Rates Spark: Either way, the Fed will surprise
At a Glance
The desk anticipates a nuanced response from the Federal Reserve during its upcoming meeting, suggesting the Fed will likely maintain its current rate, potentially surprising the market which sees a 30% chance of a hike. Per the full note source, the underlying forces, particularly the influence of oil prices, are creating a split sentiment among traders, complicating predictive assessments. With our economists projecting no rate hike this year if oil continues to decline, the market's dovish shift appears justified. This dovish stance is reinforced by ongoing trends in the UK and Eurozone, where tightening is also seen as unlikely given current economic indicators.
Key Takeaways
- 01The Federal Reserve is expected to hold rates, defying a 30% market expectation for a hike.
- 02Oil prices remain a significant influencer on inflation expectations and hence rate decisions.
- 03Market positioning reflects a general hawkish sentiment that may not align with economic fundamentals.
- 04GBP/USD forecasts reveal a convergence around the 1.35 target amid varying viewpoints from different banks.
Full Analysis
What the desk is arguing
The desk expects the Federal Reserve will opt for a hold on rates during its next meeting, countering market expectations that suggest a hike is plausible. Per the full note source, the current elevated oil prices have contributed to a heightened perception of inflationary pressures, yet projecting a material dovish pivot remains difficult without further data.
The consensus view among our economists aligns with a hold, driven by a potential downturn in oil prices that may obviate the need for immediate action. This positions the 2Y USD swap rates for a downward shift, consistent with the anticipation of a stable Fed policy over the coming months.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.3500 with a range from 1.2400 to 1.3800. Specific Dec-26 targets among leading firms include: - goldman: 1.3600 - commerzbank: 1.4020 - bofa: 1.4300
This perspective indicates that we are aligned within the lower spectrum of forecasts but resonating closely with bofa, which maintains a similar target outlook for Mar26. The broader market seems too hawkish, particularly in considering the Fed's possible reluctance to shift policy aggressively.
How other firms see it
There is a general alignment from firms such as goldman and commerzbank, both forecasting higher targets in the medium term, while more dovish sentiments can be seen from bofa with their lower projections. This split highlights a crucial divergence in how firms perceive the Fed’s potential path.
The dynamics of GBP/USD are tightly linked with the actions of the Fed and the Bank of England, making the path of these currencies particularly sensitive to upcoming central bank communications and inflation prints.
What the calendar says
Upcoming events, including the Fed's meeting, are critical as they will shape expectations around rate movements in the context of current selling pressures stemming from oil price adjustments. As the situation evolves, any developments will clearly affect market positioning and sentiment.
Market Implications
Traders should closely monitor the Fed's rate decision and any indications regarding future hikes, especially with GBP/USD currently trading around 1.3476. A clear hold could solidify the anticipated dovish sentiment in markets, allowing GBP to stabilize or strengthen against the USD, particularly if oil prices continue to decline.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.2800 |
UOB | Bullish | 1.3445 |
UBS | Bullish | 1.3500 |
From the original
Articles Rates Spark: Either way, the Fed will surprise Published 07:31 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets are split about the Fed's move on Wednesday, and with no forward guidance, we don't expect that to change. In a
Related speeches
4 itemsFOMC preview: Fed to stay on hold after June’s hawkish shift
The desk anticipates that the Federal Reserve will maintain its current policy stance during the upcoming FOMC meeting on July 28-29, 2026, refraining from rate hikes despite elevated market expectations fueled by rising oil prices. Per the full note from ING, softened inflation and labor market data have diminished the urgency for action, leading to a shift in market sentiment from roughly 80% likelihood of a rate increase to no hikes being priced in. Key indicators such as the June CPI at 0.1% versus expectations of 0.4% and disappointing non-farm payroll growth of just 57,000 underscore this cautious outlook. As seen in our internal research, the consensus target for EUR/USD reflects a level of 1.16, aligning with the Fed's cautious tone.
Rates Spark: A Fed hike could shake sentiment
The desk interprets the recent research from ING which suggests that even if the Federal Reserve holds rates steady, the market still prices a 30% chance of a hike that could disrupt sentiment in the short term. This uncertainty might lead to upward pressure on EUR and GBP front-end rates, reflecting a hawkish tilt that could result in further positive positioning in European rate markets. However, should the Fed proceed with a hike, tighter financial conditions could dampen positive market sentiment and impact risk assets. Per the full note [source], longer-dated rates may struggle to maintain their upward momentum in such a scenario.