Rates Spark: Room for Warsh to shift the narrative
At a Glance
As markets adjust to the complex interplay between U.S. rate hike probabilities and inflation expectations, Chair Warsh's testimony could serve as a pivot point for sentiment. Per the full note , there is a marked increase in the rate hike discount compared to a stabilization of inflation expectations, setting the stage for potential shifts in yield curves. Currently, the U.S. 10-year yield is above 4.6%, with heightened geopolitical tensions potentially influencing real yields and providing a backdrop for Warsh's remarks. The consensus target for EUR/USD remains at 1.1750 for December 2026, within a span indicating a relatively stable expectation amid this volatility.
Key Takeaways
- 01Chair Warsh's testimony may influence U.S. yield curves and market sentiment.
- 02Current U.S. 10-year yields above 4.6% reflect a critical juncture in inflation expectations.
- 03The EUR/USD consensus target remains stable at 1.1750, indicating resilience amid volatility.
Full Analysis
What the desk is arguing
The desk posits that Chair Warsh's upcoming Congressional testimony could reinforce the trend of widening yield curves, as he may underscore the easing of inflation expectations despite the build in rate hike pricing. This narrative shift could help to steepen the curves, creating market opportunities. Per the full note , the increase in U.S. yields is underscored by rising geopolitical tensions, particularly involving Iran, which are impacting market and inflation expectations significantly.
Further supporting this perspective, the 2-year yield has now surpassed 4.25%, compared to under 3.4% prior to recent conflict escalations. The current market pricing suggests a 25bp hike is anticipated for the September meeting, reflecting shifting investor sentiment.
Where it sits in our coverage
The current consensus target for EUR/USD stands at 1.1750, reflecting a wide range among firm forecasts: - commerzbank: 1.2200 - goldman: 1.1200 - hsbc: 1.1050
This positioning indicates that our desk's view aligns closely with the prevailing market sentiment, suggesting stability near the middle of the forecast spread. Given the ranges cited, our current perspective could diverge towards a more bullish outlook compared to some peers.
How other firms see it
Many firms are currently aligned with a bullish stance, particularly those like mufg and scotiabank, who are pricing similar outcomes for EUR/USD. Conversely, firms such as citi remain on the bearish side, reflecting a more cautious outlook on potential rate increases. The forthcoming cues from U.S. economic indicators and central bank communications will likely influence this dynamic.
The interplay between U.S. yields and European central bank policies will be crucial, especially as the EUR/USD rate trajectory mirrors broader shifts in monetary policy expectations across both regions. Additionally, the situation in geopolitics will be instrumental in determining how these rates adjust going forward.
Market Implications
Watch for any market reaction to Warsh's commentary, particularly around the 10-year yield levels. Given the current trajectory, if yields continue to rise, it could challenge existing EUR/USD resistance levels.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
From the original
Articles Rates Spark: Room for Warsh to shift the narrative Published 16:05 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contrast the build in the US rate hike discount to the taming in inflation expectations. Chair Warsh can choose to
Related speeches
4 itemsRates Spark: Warsh’s Fed takes inflation seriously
The desk underscores a bullish sentiment towards the sensitivity of the Federal Reserve towards inflation, as indicated by an uptick in the 10-year Treasury yield to around 4.45%. This rise stems from an increase in real yields, juxtaposed against a decline in breakeven inflation, reflecting a cautious but proactive stance by the Fed under Warsh's leadership. Per the full note from the bank research, this markedly shifts market expectations regarding future rate hikes. Consensus now hints at a potentially flatter yield curve, with the Fed signaling its readiness to combat inflation, even if rate hikes aren’t definitively on the horizon.
Warsh guides forward without forward guidance
Lead — The desk sees a net hawkish tilt emerging from Chair Warsh's latest commentary at the Jackson Hole Symposium, signaling potential shifts in monetary policy without explicit forward guidance. Per the full note, Warsh emphasized the Fed's commitment to controlling inflation, asserting a belief that current inflation expectations might not be well-anchored, which has impacted both front and back-end rates. The current consensus for EUR/USD sits at 1.1700 for Mar26, aligning with this hawkish sentiment amidst a mixed outlook from various firms. In this context, traders should monitor the evolving interest rate landscape closely.