Rates Spark: Hawkish sentiment helps the long end stay anchored

What the desk is arguing

The desk views the current sentiment as a strong indication that central bank hawkishness is fundamentally influencing rate expectations across the board. The stability in longer-term rates, particularly in the Eurozone, is attributed to ECB officials maintaining their hawkish communications even as oil prices have dipped significantly.

This backdrop supports expectations for another ECB rate hike, likely in September or October, as identified by market confidence with current rates already priced in. Notable commentary includes Philip Lane suggesting that the neutral rate could shift to 2.5%, reflecting the economy’s resilience against inflation pressures, despite lower energy costs.

Where it sits in our coverage

For EUR/USD, our current consensus target stands at 1.1700, with a range spanning from 1.1200 to 1.2000. Specific firms projecting close targets include deutschebank (Dec-26 target at 1.2500) and mufg (Dec-26 target at 1.2400).

The desk’s view aligns closely with the upper bound of the market consensus, indicating a strong potential trajectory for the currency pair given the ECB’s hawkish stance.

How other firms see it

In the broader context, firms like barclays and hsbc align with the hawkish sentiment, expecting similar rate hikes from the ECB and corresponding impacts on EUR currency pairs. Conversely, firms like commerzbank appear more cautious with lower projections for both EUR and GBP.

The EUR/USD trajectory will likely mirror the reactions to ongoing ECB communications, while the GBP/USD rate path remains sensitive to the BoE's future monetary policy alignment and potential divergences.