Rates Spark: Still exposed to more upside
At a Glance
The desk at source argues that 10-year yields remain exposed to further upside until a resolution in the Middle East materializes, with EUR rates more vulnerable to a sentiment shift than their US counterparts due to a shakier macroeconomic backdrop. The view is driven by a lack of near-term catalysts to break the bearish dynamic, as rates have already pierced key levels without triggering reversals. This positions EUR rates as a tail risk in the global upward drift, while US rates show relative resilience. Consensus among other major banks points to a wide divergence on EUR/USD, with forecasts ranging from 1.04 to 1.12 for year-end.
Key Takeaways
- 0110-year yields are biased higher until a Middle East resolution, per ING Think.
- 02EUR rates are more vulnerable than US rates to a sentiment shift.
- 03Consensus EUR/USD year-end forecast range is 1.04–1.12, with wide dispersion.
- 04Next catalyst is US CPI on May 14; no eurozone events in the next 30 days.
Full Analysis
What the desk is arguing
Per the full note source, the core thesis is that 10-year yields cannot sustainably decline without a diplomatic resolution in the Middle East, leaving them biased to test higher levels after breaching key technical thresholds. The desk frames EUR rates as particularly exposed to a sudden sentiment shift, citing a weaker economic backdrop in the eurozone versus the US.
The supporting evidence leans on the absence of a de-escalation trigger and the fact that yield momentum has carried through prior resistance levels without a pullback. The desk implicitly rejects the notion that current yield levels already price in sufficient risk premia, arguing instead that further upside is the path of least resistance.
The alternative read—that Middle East tensions have already been fully discounted—is dismissed as premature given the fluidity of the situation and the lack of a clear catalyst for reversal.
Where it sits in our coverage
Our internal consensus model for EUR/USD shows a Dec-26 target of 1.075 with a range of 1.04–1.12, reflecting wide disagreement among the 12 firms tracked. Key outliers include: - jpmorgan: 1.10 (Dec-26) - bofa: 1.04 (Dec-26) - goldman: 1.08 (Dec-26) - morganStanley: 1.06 (Dec-26)
The source call sits near the bearish end of the spread, aligning more closely with bofa and morganStanley than the more bullish jpmorgan and goldman. It diverges from the consensus mean by explicitly pricing a higher probability of further rate upside, which would weigh on EUR/USD.
How other firms see it
Aligned firms include bofa (1.04) and morganStanley (1.06), both of which see EUR weakening on the back of relative rate dynamics. The contrary camp is led by jpmorgan (1.10) and goldman (1.08), which anticipate a shallower yield curve and a stronger euro as the Middle East risk subsides.
Related themes to watch include the EUR/USD trajectory, which mirrors the ECB vs Fed rate path divergence, and the potential for a safe-haven USD bid to persist, dragging crosses like GBP/EUR lower. The next key input is the US CPI release on May 14, which could either validate or challenge the US exceptionalism narrative.
What the calendar says
With the US CPI release on May 14 as the immediate high-impact event, the data will test whether US yields can sustain their recent march higher. A hot print would reinforce the desk's bias for further yield upside, while a miss could trigger a relief rally for EUR rates. No eurozone-specific high-impact events are scheduled in the next 30 days, leaving EUR rates to be driven by external factors.
Market Implications
Watch 10-year UST yields for a break above 4.70% as confirmation of the bull flattening bias. EUR/USD downside risk to 1.06 in the near term is elevated if US CPI prints hot, but a cease-fire in the Middle East could trigger a sharp unwind of rate upside.
From the original
It is hard to shake off the bearish dynamic without a solution in the Middle East. That means 10y yields are left eyeing further upside after marching through key levels. EUR rates are probably more vulnerable to a shift in sentiment as the backdrop looks shakier than in the US,
Related speeches
4 itemsRates Spark: Differences brought into sharper relief
The desk posits that the widening macroeconomic disparities between Europe and the US are creating distinct paths for interest rate movements, notably with European rates showing greater potential for upward adjustments. Per the full note from ing-think, recent market sentiment has shifted towards the possibility of a diplomatic resolution in the Middle East, which further highlights these macro differences. The desk notes that recent US rate increases have been primarily driven by real economic components rather than inflation expectations, thus limiting future upside potential. In contrast, European rates could benefit more from easing geopolitical tensions. This divergence is critical as we consider forex positioning, particularly in relation to cross-currency pairs influenced by different central bank outlooks.
FX Daily: Looking for stabilisation
The desk interprets current market dynamics as a moment of stabilization for the euro, anticipating a potential rebound against a strong dollar. Per the full note, this calm in risk sentiment could allow EUR/USD to maintain levels above 1.130. In light of expected US data, particularly the core PCE, the path forward suggests a bearish USD potential, with the market pricing in a quasi-dovish Fed stance for December. Recent consensus reflects a broad range for EUR/USD targets, indicating a divided outlook among leading firms.