FX is a rates market wearing a currency costume
Currency traders watch currency charts. The people moving size watch bonds, and currencies follow.
A government bond pays a fixed coupon. Its yield is that coupon relative to the price you pay. Price and yield move inversely: when investors sell bonds, price falls and yield rises.
Yields matter to FX for a direct reason — a bond yield is the return on holding that country's currency risk-free. Capital flows toward the better risk-adjusted return, and the currency follows the capital.
The number that actually drives currencies
Not the outright yield. The differential.
`` US 10-year yield 4.30% German 10-year yield 2.40% Spread: 1.90% in the dollar's favour ``
EURUSD tracks that spread far more closely than it tracks either yield alone. If the spread widens, the dollar strengthens. If it narrows, the euro does.
This is why "the Fed is hawkish" is an incomplete thought. Hawkish relative to whom? If the ECB turned hawkish on the same day, the spread has not moved, and neither should EURUSD.