Rates Spark: The fiscal number can eclipse CPI
At a Glance
The transition to higher U.S. yields is becoming increasingly influenced by the deteriorating fiscal deficit, which could overshadow the consumer price index (CPI) readings. As highlighted in the full note, concerns over the fiscal deficit are intensifying, with the forthcoming CPI expected to show a core rate of 2.5% year-on-year, which many in the market view as manageable. However, with market break-evens currently under 2.5%, the focus may pivot towards how the fiscal landscape could impact the supply of bonds. This scenario underscores the importance of understanding fiscal shifts in the context of Fed policy and bond market reaction as we progress through the second half of 2026.
Key Takeaways
- 01Higher U.S. yields may be increasingly driven by fiscal deficit concerns rather than traditional inflation metrics.
- 02Upcoming U.S. CPI is anticipated at 2.5%, while market break-evens remain below this level, indicating a relaxed market stance on inflation.
- 03Emerging fiscal implications could dominate bond market narratives, potentially pressuring yields higher.
- 04Consensus targets for EUR/USD range from 1.1200 to 1.2000 for March 2026, highlighting divergent views among firms.
Full Analysis
What the desk is arguing
The deterioration of the fiscal deficit could have a more pronounced impact on bond supply than the upcoming U.S. CPI numbers. Per the full note, although the CPI inflation print is critical, the market's current relaxed stance indicates that it is the fiscal implications that could dictate yields moving forward. With expectations of a core CPI of 2.5%, the emphasis on fiscal health may start to overshadow inflation fears in bond markets.
The desk draws attention to the relationship between fiscal policy and bond yields, emphasizing that a looser fiscal stance could lead to an increased supply of bonds, thus pressuring yields higher. With break-evens running in the 2.25% range, this indicates that any significant fiscal news could lead to quicker adjustments in yield expectations.
Where it sits in our coverage
For the EUR/USD pair, our consensus target stands at 1.1700 with a range of 1.1200 to 1.2000 for March 2026. Notable firm targets include rabobank at 1.1759, jpmorgan at 1.1800, and investec at 1.1455.
This view indicates a divergence from the consensus, particularly as some firms like citi hold a lower target of 1.1300, signaling broader market skepticism about the euro’s strength relative to fiscal developments in the U.S.
How other firms see it
Firms aligned with expecting stronger EUR/USD movements include rabobank and morganstanley, while those with a more cautious outlook, such as citi and bofa, suggest a more bearish approach.
The impact of U.S. fiscal policies may also enhance volatility in related pairs such as GBP/USD and USD/JPY, with shifts in expectations likely reverberating throughout the FX market.
Market Implications
Watch for yield movements on U.S. Treasuries as fiscal data emerges, potentially shifting sentiment in the FX market. Key levels to monitor include the 2.5% break-even inflation rate as a threshold for further directional moves in bonds and consequent FX reactions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
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Articles Rates Spark: The fiscal number can eclipse CPI Published 15:04 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download While the transition to higher US yields is linked with the war and higher energy prices, in fact the market discount f
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