Rates Spark: Oil losing control
At a Glance
The desk posits that the recent inability of USD and EUR rates to track the decline in oil prices indicates a persistent upward pressure on global rates, fueled by robust US economic data and rising inflation expectations. Per the full note from ing-think, hot US inflation readings, particularly with CPI projected to stay above 4% in May, suggest a more hawkish Fed stance which complicates the bullish narrative for rates. Current financial conditions, along with geopolitical tensions impacting oil flows, could exacerbate volatility in rates without yielding significant relief unless growth concerns intensify more substantially. This narrative appears at odds with the softer expectations emerging in some bank forecasts, given that rates remain sticky even after oil prices dipped briefly towards US$90/bbl.
Key Takeaways
- 01Persistently high US inflation is expected to push EUR and USD rates upward.
- 02Geopolitical tensions and energy costs may exacerbate financial market volatility.
- 03Market sentiment remains bullish on both USD and EUR rates despite lower oil prices.
- 04Growth concerns could be a significant catalyst in shaping future rate expectations.
Full Analysis
What the desk is arguing
The desk's central thesis suggests that the degree to which USD and EUR rates remain unresponsive to oil price movements underscores a relentless tightening of financial conditions driven by persistent inflationary pressures. The commentary indicates that unless economic growth becomes a more pronounced concern, rates are likely to remain elevated due to the backdrop of strong US labor data and hawkish signals from the Federal Reserve.
Evidence supporting this view stems from hot US inflation readings, with CPI for May expected above 4%, traditionally indicative of a more aggressive Fed response. As noted, the robust backdrop of macro data and risk assets continues to reinforce the recent hawkish repricing of rates, as reflected in the performance of longer-end US Treasury yields, which have shown a reluctance to drop significantly even with oil prices falling.
Where it sits in our coverage
Our consensus for EUR/USD sits at 1.1600 with a range from 1.1200 to 1.2000. Specific firm targets by commerzbank and jpmorgan align at 1.1900 and 1.1800 for Mar26, respectively, reflecting an upward trajectory amid current pressures.
The desk's outlook appears well-aligned with the upper bound of the consensus spread, indicating an expectation for EUR/USD to maintain strength in light of persistent inflation and hawkish central bank guidance.
How other firms see it
Many firms, including commerzbank and jpmorgan, share a similar perspective, expecting elevated EUR/USD levels. Conversely, firms such as citi project a more bearish outlook, expecting the pair to fall closer to 1.1300 by Mar26.
The trajectory of EUR/USD likely mirrors the evolving ECB rate path in response to inflation conditions, while the dynamics in USD/JPY will also reflect Fed policy responses and the resulting rate differentials.
Market Implications
Traders should closely monitor the forthcoming US CPI release, as an unexpected spike in inflation could reinforce a hawkish Fed tone, driving USD rates higher. Furthermore, maintaining a watchful eye on geopolitical developments surrounding oil could provide insight into broader market volatility.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Bank of America | Bearish | 1.1200 |
ANZ | Bearish | 1.1400 |
UOB | Bullish | 1.1565 |
From the original
Articles Rates Spark: Oil losing control 07:31 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Both USD and EUR rates are struggling to follow oil lower, and hot US inflation readings today won't support a bullish case either. Unless growt
Related speeches
4 itemsRates Spark: More repricing risk at front end
The desk views increased repricing risk at the front end of the rate curve given the recent stabilizing oil prices and their impact on inflation expectations. Per the full note from ing-think, lower oil prices have eased inflation concerns, thus rendering short-term rates excessively high in light of weakening economic dynamics, especially in the US. Current positioning reflects an underlying expectation of over 40 basis points of Fed tightening over the next year, which seems overstated given the easing inflation backdrop. The consensus among firms projects GBP/USD targets to stabilize at around 1.35 through 2026, indicating a focus on maintaining support near current levels as traders assess economic indicators.
THINK Ahead: How markets are right – and wrong – about rate hikes
The desk posits that while financial markets are pricing in multiple rate hikes from major central banks, current inflation data suggests that these hikes may ultimately be unwarranted. Per the full note [source], even with rising energy prices, essential indicators like service-sector pricing and wage growth remain stable or even subdued, indicating a divergence between market expectations and economic fundamentals. Our interpretation suggests that unless there is a marked shift in inflation data, particularly related to energy costs, market overpricing of rate hikes could lead to volatility. As of now, consensus positioning shows the market leaning toward heightened rate expectations, but the slowdown in inflationary pressures could challenge these views moving forward.