Rates Spark: Growth disappointments would still build a bullish case
At a Glance
The desk posits that despite recent growth disappointments, the overall bullish sentiment for euro rates will persist, primarily driven by upward pressure from oil prices and geopolitical tensions. Per the full note by ing-think, the 2-year Bund yield has surged towards 3% as energy prices inflate, reflecting a sensitive dynamic within euro rates compared to their US counterparts. With the current consensus target for the EUR/USD near 1.17, any offsetting weakness in growth could quickly shift ECB policy expectations, creating volatility opportunities in the FX market.
Key Takeaways
- 01Economic growth disappointments can trigger a bullish shift in euro rates.
- 02The direct influence of rising oil prices on euro rates is significant.
- 03Current consensus for EUR/USD aligns closely with the desk's bullish outlook.
- 04Market sensitivity to ECB responses amid growth fluctuations remains high.
Full Analysis
What the desk is arguing
The desk underscores that disappointing economic performance can lead to a substantial bullish shift in euro rates, emphasizing a potential disconnect between growth expectations and ECB actions. Per the commentary from ing-think, oil prices nearing $100 are not only impacting inflationary pressures but also shaping rate trajectories more acutely in Europe compared to the US.
Evidence from the research indicates that while the 2-year Bund yield has risen 90 basis points since the year's start, 10-year yields have increased less dramatically, indicating a nuanced response in market sentiment. Particularly, only 30 basis points of the yield increase is attributed to actual inflation expectations, underscoring the vulnerability of the eurozone to external shocks when growth falters.
Where it sits in our coverage
Our consensus target for EUR/USD currently stands at 1.1700, with a range from 1.1200 to 1.2000. Notable firm targets for December 2026 include: - RBC: 1.2000 - Morgan Stanley: 1.2150 - Investec: 1.1700
The desk's positioning aligns closely with the upper end of this range, particularly reflected in outlooks from firms like Morgan Stanley and RBC, suggesting a growing consensus on the potential for EUR appreciation against the USD.
How other firms see it
Firms aligned with the desk’s view include Nomura and CIBC, both expecting EUR/USD to remain strong, while Danske Bank and Lloyds exhibit more cautious stances regarding potential declines in the euro.
The sentiment surrounding EUR/USD trajectories is mirrored in discussions around the ECB’s rate path and the global energy market. Traders should look for potential spillovers from shifts in energy prices affecting broader eurozone economic outlooks.
Market Implications
Traders should monitor the 2-year Bund yield as a key indicator, with a focus on moves above 3%. The next significant test will be market reactions to ECB communications and positioning ahead of potential shifts in growth forecasts, especially with geopolitical tensions affecting oil prices.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
From the original
Articles Rates Spark: Growth disappointments would still build a bullish case Published 07:25 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download With oil approaching $100 again, euro rates are following higher. But the upward pressure is not just a
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4 itemsPreview: ECB set to hold rates in July, hints of September hike expected: ING
The ECB appears poised to maintain its current rates during the July meeting, with market participants leaning towards a hawkish hold that anticipates a September rate hike. Per the full note from ING, the bank forecasts EUR/USD stability around 1.140 and Bund yields at 3.15% in a hawkish hold scenario. Conversely, signs of dovishness could push EUR/USD lower to around 1.130 and yield a further drop in Bund yields. Given the current environment, the desk underscores the significance of oil price movements and potential ECB sentiment shifts as we look ahead to September decisions.
Rates Spark: Sentiment looking through geopolitical risks
Current market sentiment appears to be disregarding new geopolitical tensions despite higher oil prices, which contribute to elevated inflation expectations and nominal interest rates. Per the full note [source], the ongoing rise in oil prices has led to increased volatility in risk assets but has not notably spiked European bond yields. While Bunds remain stable, inflation expectations from higher oil prices could force the front end of the yield curve upward, especially if the geopolitical climate further deteriorates. Consensus forecasts for EUR/USD currently sit at 1.1700, revealing some divergences in trader expectations for the pair's trajectory.