Rates Spark: Still leaning hawkish, but no action by the Fed
At a Glance
The desk suggests that despite the Fed's pause, its hawkish signals in recent communications are influencing the bond market, particularly pushing the 10-year UST yield back above 5%. Per the full note from ing-think, Fed Chair Warsh's reassuring stance on inflation expectations has temporarily dampened yield responsiveness, yet he remains committed to achieving 2% inflation, suggesting a long-term tightening path. Our internal coverage shows mixed consensus targets for major currency pairs, indicating traders’ uncertainty in the face of Fed policy. As we look ahead, the absence of high-impact events on the calendar may lead to limited volatility in the short term.
Key Takeaways
- 01The Fed's current hawkish stance supports UST yields above 5%, reflecting investor concerns on inflation.
- 02Chair Warsh's remarks indicate a commitment to achieving 2% inflation, adding to tightening expectations.
- 03Current market consensus for EUR/USD shows divergence, with targets including 1.1700 from several firms.
- 04No high-impact events are scheduled in the immediate term, hinting at a quiet trading environment.
Full Analysis
What the desk is arguing
The desk frames this as a critical moment where elevated inflation levels coexist with a Fed that remains on hold. According to the commentary, while there is no immediate action from the Fed, the hawkish tone in statements hints at further tightening in the future, particularly if inflation stays stubbornly high.
The recent rebound in the 10-year UST yield above 5% validates this argument, as noted by the analysts who identified a pivotal shift in bond market sentiment. Warsh's reflections that inflation expectations seemed contained resonate with investors, offering a momentary retreat in terms of aggressive yield movements.
Where it sits in our coverage
For the EUR/USD, our current consensus target is 1.1253, with a median forecast for March 26 of 1.1700, reflecting a range of 1.1162 to 1.2000. Specific firm targets include commerzbank at 1.1900 and rabobank at 1.1759.
The desk's view aligns closely with consensus positioning, as it sits near the upper end of the range, which suggests a cautiously optimistic outlook towards the Euro against the Dollar amid the prevailing Fed dynamics.
How other firms see it
Several firms, including rabobank and nomura, share a similar constructive view towards EUR/USD, indicating alignment around the strengthening of the Euro. Conversely, hsbc projects a more conservative target, signaling caution amidst the current inflation climate.
The outlook for GBP/USD also intersects with these dynamics, especially regarding the anticipated Bank of England's policy adjustments, which may further refine market expectations across these pairs.
Market Implications
Traders should monitor UST yield levels closely, particularly around 5.25%, for signs of adjustment that may impact currency valuations. Additionally, the lack of upcoming events could lead to a quieter trading period, but unforeseen inflation data could spark activity.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
From the original
Articles Rates Spark: Still leaning hawkish, but no action by the Fed Published 17:33 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download On the Fed, it's tough to view the current set-up of still elevated printed inflation and a Fed on hold a
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4 itemsRates Spark: Leaning hawkish, but no action
The desk interprets the Fed's recent statements as signaling a hawkish tilt without immediate action, suggesting a continued focus on achieving price stability anchored around the 2% inflation target. Per the full note from ING, the U.S. 10-year Treasury yield has notably surpassed the 5% mark, reinforcing market expectations surrounding the Federal Reserve's stance on interest rates. The upcoming economic data releases may further influence this trajectory, especially as elevated inflation remains a concern. Meanwhile, our consensus targeting for EUR/USD reflects a potential upward trajectory, despite varied expectations across firms.
Rates 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.