Carsten: Weathering the shocks
The desk posits that despite significant geopolitical and economic shocks this summer, the global economy appears resilient, albeit possibly mispriced. Per the full note, the emerging risk is a bond market sell-off linked to rising rates, which could weigh heavily on growth. Current leading indicators suggest continued, albeit subdued, growth ahead. With our internal targets for EUR/USD at 1.1700 by Mar-26 and USD/JPY at 155.0000, the market is largely pricing in the dislocation from current geopolitical tensions and central bank pivots. There are no high-impact calendar events ahead that may disrupt this outlook.
What the desk is arguing
The desk frames this as an intriguing paradox; despite numerous shocks — from climate events to geopolitical tensions — the resilience of the global economy is notable. The rising concern revolves around the bond market's reaction to these shocks, particularly the risk posed by increasing rates which could lead to weakened economic performance.
Central to this narrative is the shift in market pricing regarding geopolitical stability, especially in the Middle East, and its impact on oil prices and inflationary expectations. The commentary highlights that this unexpected resilience may not hold permanently, especially with monetary tightening continuing as a factor in economic assessments.
Where it sits in our coverage
For EUR/USD, the consensus target is 1.1700, within a range of 1.1200–1.2000, while for USD/JPY it stands at 155.0000 with a broader consensus ranging between 149.0000 and 161.7145. Specific Dec-26 targets include: - ing: EUR/USD at 1.1700, USD/JPY at 152.0000 - rbc: EUR/USD at 1.1700, USD/JPY at 147.0000 - morganstanley: EUR/USD at 1.2150, USD/JPY at 140.0000
This view aligns with the broader cross-firm consensus, with positions generally clustering around similar targets for EUR/USD, indicating a consistent outlook on the pair. However, USD/JPY sits at the lower end of the collective range, highlighting potential divergence from bullish perspectives.
How other firms see it
The prevailing view among aligned firms such as ing and rbc suggests a cautious outlook consistent with the desk's stance on EUR/USD, while morganstanley appears more bullish on both pairs, indicating disparate assessments of the underlying economic resilience.
Monitoring the USD/JPY trajectory can serve as a barometer for market reactions to potential interventions from the Bank of Japan, particularly around inflation data and rate path expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The global economy shows resilience amid unprecedented shocks.
- 02Emerging risks from the bond market could challenge this resilience.
- 03Our internal targets for EUR/USD are 1.1700 and USD/JPY at 155.0000.
- 04No immediate high-impact calendar events to disrupt market sentiment.
Market implications
Watch for any significant movement in bond yields, as a continued uptick could pressure both the EUR/USD and USD/JPY. Given our targets, a shift in sentiment ahead of Q4 earnings could catalyze further volatility.
Risks to this view
Any unexpected escalation in geopolitical conflicts, particularly in the Middle East, could reverse current sentiment and lead to a reassessment of both EUR/USD and USD/JPY positions. Additionally, a surprise central bank move could significantly alter investor outlooks.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
J.P. Morgan | Bearish | 1.1300 |
UBS | Bullish | 1.1800 |
Articles Carsten: Weathering the shocks Published 11:50 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The most striking thing about this summer isn’t the string of unprecedented shocks – it's that the global economy has barely flinched. But a new risk has emerged in recent days, and this one comes with a transmission channel attached: the bond market sell-off. Higher rates could be kryptonite for an economy that has so far looked suspiciously bulletproof Carsten Brzeski Several heatwaves and a long drought.
A trade war between the US and Canada. Iranian-American negotiations that ran hot, then cold. A Strait of Hormuz that reopened, then closed again.
And oil prices doing what oil prices do when all of the above happens at once. The striking thing about this summer isn’t this list. It’s that the global economy barely flinched.
Most leading indicators still point to continued, if subdued, growth for the rest of the year. Numbness, or a real disconnect between geopolitics and macroeconomics? Perhaps a bit of both.
Supply chains have got better at routing around trouble, and headlines still move considerably faster than order books. But we should stop congratulating the patient before the tests come back. Because a new risk has emerged in recent days, and this one comes with a transmission channel attached: the bond market sell-off.
Higher rates could be kryptonite for an economy that has so far looked suspiciously bulletproof. The trigger, in my view, is not the admittedly worrying fiscal position of many developed economies. Weak public finances are not new, and there was no shortfall or newly discovered black hole to set anything off.
What changed is the scenario markets are pricing: a Middle East conflict that has become an almost-forever war, oil prices high for longer, inflation pushed up, and central banks forced to hike harder. The feedback loop is the dangerous part. Yields didn’t rise because of sovereign woes – but rising yields draw attention back to sovereign weakness, and the story can quickly become self-fulfilling.
Higher interest payments crowd out more useful spending, which makes the fiscal picture worse, which justifies the yields. Back in 2020, the US paid some 3% of GDP on interest; now it is closing in on 5% of GDP. France is moving from a good 1% of GDP to 3% of GDP, and even fiscally-sound Germany moves from 0.5% GDP to 1.5% GDP.
But don’t be too alarmed. I think markets have got ahead of themselves. It's hard to imagine major central banks raising interest rates enough to push their economies into recession in response to what remains a textbook exogenous supply shock.
Sources & References
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