Dollar climbs to three-month peak alongside Treasury yield surge, EUR/USD breaks below key level

The greenback appears to have shifted into a higher gear once more, with the bond market continuing to drive much of the momentum.

Following a robust performance in September, the US currency is now reaching its strongest point in over a quarter. The dollar index is now advancing towards 102, driven by another upward move in Treasury yields. The 10-year yield hit an intraday peak of 5.34%, the highest since 2002, before retreating slightly to 5.29%.

The bond market's move stands out, especially after a softer-than-expected US PCE inflation reading on Wednesday briefly tempered expectations for a Federal Reserve rate hike this month. While the front end of the yield curve may be more responsive to that repricing, longer-dated yields are clearly not following suit.

For currency traders, the yield story is becoming increasingly hard to overlook.

EUR/USD reflects this, with the pair now dropping below the 1.1300 mark and breaking through a key support zone on the weekly chart.

The 1.1350 to 1.1400 area had been holding sellers at bay, supported by the 38.2% Fibonacci retracement level at 1.1355. However, the current decline below that region also risks a firmer break beneath the June low at 1.1325. More critically, the 100-week moving average (red line) near 1.1358 appears to be giving way.

The drop below the highlighted zone has already tilted the technical bias further in favor of sellers. If buyers fail to secure a weekly close above the 100-week moving average, that would cement the downside leg below the 1.1300 level as October trading begins.

From here, the next major downside target is 1.1200. Beyond that, the 200-week moving average (blue line) around 1.1094 and the psychological level at 1.1000 will come into focus.

For now, the bond market is still setting the pace for the dollar and major currencies. As long as yields continue to push higher, the greenback benefits from a straightforward fundamental tailwind, giving EUR/USD sellers little incentive to step aside.