Rates Spark: Warsh’s Fed takes inflation seriously

What the desk is arguing

The desk posits that the Fed's newfound focus on inflation, particularly under Warsh's stewardship, instills credibility in potential policy shifts, which could influence the yield curve significantly. Per the full note source, the recent shift in the Treasury curve, with long-dated yields remaining sticky to the upside, illustrates the market's reaction to this new Fed posture.

This sentiment is reinforced by the observed dynamics in the real versus breakeven yields, where a larger increase in real yields has occurred despite falling breakeven inflation rates. This balancing act indicates that while inflation is on the Fed’s radar, the approach may be one of caution rather than commitment to immediate rate hikes.

Where it sits in our coverage

For EUR/USD, our current consensus target is 1.1567, with an average forecast of 1.1700 by March 2026, supported by firms like deutschebank at 1.1800 and mufg at 1.1800. Notably, this positions our view near the lower end of the broader spread among analyst targets, reflecting a more cautious outlook in relation to anticipated Fed actions in the coming months.

How other firms see it

Across the board, aligned firms such as hsbc and bofa maintain a contrarian stance, each anticipating a steadier or even weakened path for the dollar relative to the euro and pound in the face of Fed signaling. Conversely, contrary institutions like mufg see potential strength for GBP/USD, positioning themselves at the upper end of forecasts.

The scrutiny of the ECB’s decisions surrounding potential rate changes coincides with this narrative, as the EUR/USD trajectory is likely to mirror not just Fed leadership, but also European economic indicators heavily influenced by the BoE’s choices.