Rates Spark: Resumed steepening impulse
At a Glance
Lead — The desk anticipates a continued steepening of the yield curve following Thursday's disappointing US payrolls data. The employment metrics indicate a cooling labor market, which should support lower short-dated yields while allowing long-dated yields to remain elevated. Per the full note source, the employment growth for June missed expectations at 57k, coupled with a downward revision to the previous month, signaling less urgency for rate hikes. This backdrop positions the USD for a potential weakening against major currencies such as EUR and GBP as markets recalibrate their expectations for Federal Reserve policy.
Key Takeaways
- 01US payroll data shows weak employment growth (57k) and a falling unemployment rate (4.2%).
- 02The yield curve is steepening as long-dated yields are expected to hold while shorter yields fall.
- 03This environment favors long positions in EUR/USD and GBP/USD against the USD.
- 04Cross-market correlations signal potential for significant USD weakness in the medium term.
Full Analysis
What the desk is arguing
The desk expects that the steepening trend in the yield curve will persist, with lower short-dated yields pushing rates down further while long-dated yields stabilize. Per the full note source, the unemployment rate dropped to 4.2%, suggesting some resilience in the labor market, but the muted job growth tempers the likelihood of further immediate rate hikes. This environment is critical for FX positioning in pairs like EUR/USD and GBP/USD, which are influenced by interest rate differentials.
The data indicates that longer-dated yields are underpinned by a persistent selling of inflation expectations, which could signal more sustained relative strength for currencies like the euro and pound against the dollar. With the 2-year yield showing a tendency to stay lower and the curve net steepening, traders might increasingly favor trades that capitalize on this dynamic.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1700, within a range of 1.1200 to 1.2000. Specific Dec-26 targets from firms include Goldman at 1.2000, Deutschebank at 1.2500, and MUFJ at 1.2000.
This view aligns closely with Scotiabank, projecting a March 2026 target of 1.1734, while Citi stands on the lower end with a target of 1.1300. The desk's positioning implies an upward trajectory that is reinforced by recent labor data anomalies, contrasting with broader market pessimism reflected in some conservative forecasts.
How other firms see it
Firms aligned with the desk’s outlook include Scotiabank, Goldman, and Deutschebank with bullish targets reflecting expectations for currency appreciation against the USD. In contrast, Citi and MUFJ exhibit a more cautious stance, forecasting lower targets that may not fully align with the anticipated market shifts.
Furthermore, the GBP/USD trajectory mirrors the expected approach of the BoE and could create opportunities as these trends develop. Traders should also keep an eye on the USD/JPY dynamic influenced by Fed decisions and BOJ policy signals, particularly given how divergence in rate paths can impact cross-currency flows.
Market Implications
Traders should closely monitor the 10-year yield, which has been hovering around the 4.45% to 4.50% range, while keeping an eye on the consensus targets for EUR/USD and GBP/USD as they reflect the expected market shifts. With no major economic events on the horizon, sentiment may remain fluid, potentially allowing for adjustments in positioning based on market perceptions of US labor data.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
MUFG | — | 1.2000 |
Citi | — | 1.1200 |
UOB | — | 1.1445 |
From the original
Articles Rates Spark: Resumed steepening impulse 07:51 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Thursday's payrolls number prompted some steepening. We think there is more to come, as longer dated yields hold up while shorter dated yields