The US dollar is falling despite accelerating US inflation and Brent climbing above $110/bbl for the first time since May. A week ago that combination would have pushed EUR/USD down toward 1.10 or lower — especially with unrest spilling across Europe. France is burning, protests have spread to Italy, strikes are being planned in Spain, and Belgium and Portugal are noisy. What is going on? Has the FX market been turned upside down?

Yield-spread dynamics between French and German bonds

Paris is aflame, and the spread between French and German yields has reached two-week highs. A little more and the spread could spike toward levels last seen during the European sovereign-debt crisis. The CAC-40 closed deeply in the red. European assets are being sold off, speculators are building net short positions in the euro, and Barclays warns that a divided parliament makes a budget deal unlikely. The medium-term outlook for EUR/USD remains "bearish."

But in practice the major pair has recovered above 1.12 and continues to climb. How to understand that? The reasons must be sought not in Europe but in the United States — and not in macro statistics but in the equity market.

Hedge-fund positioning in the euro

For a long time, stock indices rose together with the US economy thanks to artificial-?intelligence technology. AI is what underpinned the narrative of US exceptionalism and formed the basis of the greenback's uptrend. However, Treasury yields are now at a level that threatens both capital investment and expected returns, and investors are beginning to sell tech stocks. This development supports EUR/USD more than France's budget crisis or US inflation would push it down.

Indeed, by October 16, not only the US dollar but also currencies of other AI beneficiaries — Taiwan and South Korea — were weakening. Issuer countries closely tied to AI were among the main winners from the tech boom.

Will the sell-off in these currencies reverse? The answer depends on two factors: whether Treasury yields fall and whether tech giants' earnings meet optimistic expectations. Yields have already been declining as demand for safe-haven assets rose following the Nasdaq 100's worst drop since April 2025. We now await corporate reports from NVIDIA and other issuers. Until those appear, the major pair risks remaining stuck in consolidation.

Technically, EUR/USD's daily chart shows a pin-bar with a long lower wick. Bulls pushed prices back above the fair-value area at ~1.1205, demonstrating their strength. A breakout above 1.1235 would be a buy signal. Returning to short positions makes sense only below 1.1200.