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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 37 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 37 institutional desks. No promotion.
The desk interprets the recent commentary on Dutch pension funds as indicative of a broader shift in demand dynamics for euro swaps, particularly as pension funds shift away from their role as a shock absorber in higher rate environments. Per the full note , the new pension framework restricts the hedge flexibility for pension funds, effectively reducing their responsiveness to rising rates. This could lead to upward pressure on long-dated euro swap rates, which, paired with current EUR consensus targets, suggests potential volatility in EUR/USD. Ahead of potential ECB signals, the market is watching closely how these changes might interact with broader monetary policy shifts.
The desk frames the evolving landscape for Dutch pension funds as a pivotal factor affecting euro swap dynamics and, subsequently, EUR/USD pricing. Per the full note , the pension reform has curtailed the ability of funds to dynamically manage their interest rate hedges as they did in the past, particularly in reaction to rising rates.
Historically, these funds provided significant demand for euro fixed receiver swaps, especially when interest coverage ratios increased. With the transition to a more rigid hedging structure, the Netherlands’ largest fund, ABP, sets predetermined hedging ratios by participant age, significantly influencing market hedging strategies.
This diminished flexibility could make it less likely for pension funds to counteract rising rates with substantial receiver-swap purchases, adding to the upward pressure on long-dated euro swap rates that traders must now factor into their strategies.
Our consensus target for EUR/USD stands at 1.1684, with a range spanning from 1.1200 to 1.2000. Based on the latest forecasts, notable firm projections include: - rbc: Mar26 at 1.1700 - socgen: Mar26 at 1.1700 - morganstanley: Mar26 at 1.2000
This perspective aligns with the broader consensus, where the desk's insights suggest a potential upper limit on rates contrary to positions held by investec, which forecasts 1.1455 for Mar26.
A segment of firms, including rbc, socgen, and morganstanley, align with the desk's view, foreseeing a reasonable appreciation of the euro in light of shifting market dynamics. Conversely, firms like danskebank and lloyds express a more cautious outlook, with targets trending lower.
The discussion is not only centered on EUR/USD but also relevant to potential GBP rate adjustments and the spillover effects of U.S. rates on the euro area, particularly in relation to the outcome of the ECB’s monetary policy considerations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should monitor how these changes influence 30Y euro swap rates, which may diverge from common expectations, particularly as funds adjust their hedging strategies. Key resistance at levels around 1.1700 in EUR/USD may be tested if swap rates rise.
Risks to this view
A reversal could occur if the ECB signals a more aggressive rate hike path than anticipated, prompting pension funds or other institutions to recalibrate their hedging strategies back towards more dynamic approaches, thus impacting euro demand positively.
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
All 30 desk targets for EUR/USD
Articles Dutch pension funds no longer a shock absorber of higher rates Published 08:21 Rates The Netherlands Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Dutch pension funds once provided a natural source of demand as rates rose. The new pension framework offers less flexibility, making a similar wave of receiver-swap buying less likely. We still see demand for credit, mainly in assets that closely track euro swaps Michiel Tukker Dutch pension reforms are changing how funds manage risk and respond to rising rates Pension funds won’t jump in to absorb the rise in rates under new system Under the old system, pension funds often had greater flexibility in managing liability hedges, triggering large flows into euro fixed receiver swaps when rates rose.
This was particularly noticeable after 2021, when interest coverage ratios rose by some 30 percentage points. Pension funds had reduced their hedges during the low-rate environment and increased them significantly again when rates rose on the back of higher inflation. This helped to lock in healthy funding ratios.
Pension funds increased interest rate hedges when rates and funding ratios rose Source: ING, DNB, Macrobond "> Source: ING, DNB, Macrobond The new system does not offer the same dynamic hedging flexibility, which also means pension funds will be less opportunistic when rates rise. Instead, the interest rate hedging ratios per age cohort are predetermined in each fund’s transition plans. For instance, ABP (the largest fund with €500bn assets), sets a 10% hedging ratio for younger participants, which then rises to 75% for those in retirement.
In theory, these could be adjusted at later stages, but doing so is more complex than under the old system. More static hedging and structurally lower demand for longer-dated rates add to the upward pressure on 30Y euro swap rates. Liquidity conditions at the long-end of the curve can also deteriorate, something we’ve already observed in recent market moves.
For this reason, we continue to see steepening pressures on the 10s30s curve, although much hinges on the global macro environment. A flattening of the 5s10s on the back of higher oil prices pushes against these forces. Most pension funds are still incentivised to track the EURIBOR curve Whilst the new system no longer relies on a funding ratio, the EURIBOR 6M curve remains an important benchmark for hedging purposes.
So even though we see scope to rotate away from government bonds to credit, we expect funds to remain focused on credit products that closely track the swap curve. The old system did not distinguish between individual returns – everything went into one big pot – which was easy to report and communicate to participants. Better portfolio returns would simply translate into a higher funding ratio.
All liabilities were also hedged together. If the portfolio of hedges did not follow the regulatory discount rate closely (i.e. the EURIBOR 6M swap curve), the difference would simply be captured in the overall return of the portfolio. A relative gain due to, for example, positive swap spreads, would benefit all participants equally.
In the new system, interest rate hedging is applied by age cohort, and consists of a “protection return” and an “excess return” component. In practice, this still means funds manage two portfolios, but the allocation of each portfolio’s returns changes over a participant’s life cycle. Young participants are almost entirely exposed to the excess return whereas those in retirement are mostly exposed to the protection return.
The protection return can be calculated using the theoretical returns from a EURIBOR swap or from a dedicated hedging portfolio. Most funds seem to choose the theoretical method but still construct a hedging portfolio that includes a mix of bonds and swaps. This leads to a mismatch between the actual return of the hedging portfolio and the protection return allocated to participants.
The mismatch is added to the excess return component, which means that young participants will mostly absorb this. Mismatches with the swap curve get allocated to younger participants Source: ING "> Source: ING The mismatch can, for instance, stem from sharp credit spread moves and can be difficult to explain to younger participants. Young participants might find themselves penalised by losses in the hedging portfolio, even though those investments are primarily for older participants.
To avoid communication challenges, pension funds will therefore still be incentivised to construct a hedging portfolio that closely tracks the swap curve. Credit to benefit, but only those trading in line with euro swaps Whilst we anticipate a rotation away from government bonds towards corporate credit for the hedging portfolio, credit quality will remain important. Government bonds no longer benefit from preferential regulatory treatment and the shortening of duration will also help other credit products.
Therefore we anticipate an increase in demand for investment grade and Supranational, Subsovereign and Agency (SSA) bonds. But at the same time, we acknowledge credits with more volatile spreads versus swap curves will look less attractive to hold for hedging purposes. The latest data already confirms a gradual rotation from government bonds to corporate credit.
In addition, as the new system offers a clearer separation of risk for younger and older participants, we could see less demand for assets with a more moderate risk profile. Pension funds can increase the exposure to riskier assets without negatively impacting older participants. As such, categories such as USD bonds and emerging market hard currency debt might see a structural fall in demand.
Corporate credit benefits from the reforms, at the expense of govies Source: ING, DNB "> Source: ING, DNB Pension funds will be forced to rebalance hedges more frequently Moving from a defined benefits (DB) to defined contribution (DC) system also changes the liabilities base for hedges, forcing more frequent rebalancing. Liabilities under the old system were relatively stable since these were promised payments in the future. In the new system, the liabilities are a direct function of the fund’s total assets, which is volatile by nature and moves up and down alongside global financial markets.
When equities rise in value, pension funds will have to increase interest rate hedges to match higher liabilities. In theory, this should trigger large swap flows on a monthly basis, to assure compliance with the set hedging ratios. In practice, however, pension funds will likely operate with narrow ranges around the hedging targets.
While this should avoid sharp flows on every market move, we still anticipate more activity than under the old system. Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London. Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article Pension funds won’t jump in to absorb the rise in rates under new system Most pension funds are still incentivised to track the EURIBOR curve Credit to benefit, but only those trading in line with euro swaps Pension funds will be forced to rebalance hedges more frequently
How we cover this story
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EUR/USD trades 1.69% below the 30-firm median Dec-26 target of 1.1684, with a 0.14 range separating Nordea's 1.24 bull case from Citi's 1.10 floor.
EUR/USD spot at 1.1475 sits 1.79% below the 30-firm Dec-26 consensus of 1.1684, with a 0.14 spread separating the most and least bullish desks.
EUR/USD spot sits 1.78% below the 30-firm median Dec-26 target of 1.1684, with a 0.14 range separating the most and least bullish desks.
30 investment banks see EUR/USD at 1.1639 by Dec 2026
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