Global Rates: European Rate Markets – ECB meeting and European curves
The desk analyzes the implications of the forthcoming European Central Bank (ECB) meeting for the Eurozone and UK rate curves, highlighting potential shifts in market sentiment. Per the full note , expectations around the ECB's stance could lead to notable movements in EUR denominated assets as traders adjust their positions ahead of the meeting. The commentary discusses prevailing market views that are leaning toward a tightening bias, ripe for consideration by institutional investors. Compounding this, specific predictions by J.P. Morgan suggest a target rate of 1.10 for EUR/USD, indicating that strategic positioning now is crucial, especially as yields shift amidst geopolitical uncertainties.
What the desk is arguing
The desk anticipates a significant reaction in the FX markets, particularly with the Euro and UK curves, surrounding the upcoming ECB meeting. The eurozone’s economic indicators have shown mixed signals, creating a complex backdrop for the ECB's policy decisions. The forthcoming meeting could serve as a pivotal moment for sentiment, especially given current market positioning, as discussed in the podcast featuring Francis Diamond and Khagendra Gupta.
Support for this viewpoint comes from J.P. Morgan's analysis, which indicates potential rate adjustments that could alter yield curve dynamics. The strategic rates forecast places emphasis on significant shifts given the interconnectedness of global markets in light of the ECB's decisions, especially ahead of revised GDP forecasts expected post-meeting.
Where it sits in our coverage
As it stands, the consensus target for EUR/USD sees J.P. Morgan projected at 1.10, aligning with a tightening narrative while Bank of America sets a lower target of 1.04. These targets signify a divergence in outlook, with J.P. Morgan suggesting a more optimistic shift towards a robust Euro amid pressure on UK yields.
How other firms see it
Among aligned firms, J.P. Morgan stands firm with its bullish sentiment while Bank of America poses a cautious stance. With the contrasting targets, we observe a split narrative that could impact cross-border currency flows and determine the trajectory of the Euro amidst ongoing Brexit negotiations and central bank dialogues.
Related pairs such as EUR/USD and GBP/EUR will see heightened volatility based on how the ECB's meeting plays out, particularly as its decisions may resonate through the widely watched BoE policy statement due later in the month.
01The ECB meeting is poised to create significant volatility in the Eurozone and UK rate curves.
02J.P. Morgan's target of 1.10 for EUR/USD suggests a bullish outlook amidst transformative market conditions.
03The divergence in targets between J.P. Morgan and Bank of America highlights differing assessments of fundamental economic resilience.
04Strategic positioning within this context is critical as substantial market movements could be triggered by ECB decisions.
Market implications
Traders should monitor EUR/USD closely as the ECB meeting approaches, particularly looking for movement around the 1.075 mark as a potential pivot point. Additionally, any comments related to rate increases or changes in inflation expectations could act as catalysts across Euro-denominated assets, impacting overall positioning strategies in FX markets.
Risks to this view
A failure by the ECB to deliver a clear tightening signal or further dovish guidance could lead to a rapid unwinding of bullish positions in EUR/USD, especially if inflation metrics do not support the need for increased rates. Moreover, geopolitical developments could weigh heavily on market sentiment, potentially shifting forecasts dramatically.
Hi, and welcome to At A New Rate, J.P. Morgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income currencies and commodity markets. I'm Francis Diamond, Head of European Rate Strategy at J.P.
Morgan, and today I'm joined by my colleague, Kingendra Gupta, to discuss the upcoming ECB meeting, as well as curve dynamics in the Euro area and the UK in light of the recent set off from DiEM rates. So, Kingendra, let's start with the ECB. We're widely expected to hike rates 25 basis points at their September meeting, the market fully prices that hike, and then there's a cumulative 75 base points of hikes priced by the middle of next year, including expectations for the September meeting.
So what do you think we will see in terms of ECB rhetoric and forecast changes, and do you think the current market pricing is justified? Thanks, Francis. Now, market pricing of cumulative hikes to be delivered by the ECB over the next few months has sharply increased over the last few weeks.
And in my view, this basically reflects expectations of energy prices, and especially TTF futures prices staying elevated for a longer period of time. And when we couple this with the robust growth backdrop that we're seeing in the Euro area, this would suggest stickier inflation and that the ECB can go into modestly restrictive territory. So for next week, I think a 25 basis point hike is a done deal, and maybe with modest upward revision to inflation forecast for next year reflecting the energy dynamics that I was mentioning earlier.
I think in terms of rhetoric, the ECB will continue to stick with its meeting by meeting and data dependent approach and refrain from giving any strong guidance beyond that. This will basically be in line with what they have been doing for the past several meetings. You ask about the current pricing being justified or not.
I think another cumulative 50 basis point of hike, so September and another 25, can be justified given what I was discussing earlier on inflation and energy prices. And then maybe we can add another, let's say, 10 to 15 basis point of risk premium beyond that. So net net, I feel that a cumulative 75 basis point of hikes price is probably maybe 10 basis point too high.
But again, I'm not fading these moves given the uncertainty around Middle East, and of course, what's happening in the US as well. Okay. So that's shift focus to the curve in Europe.
There's also been a lot of focus both in the media and markets about the recent rise in long-end yields globally, but how has the Euro curve behaved in this move? Yeah. You know, Euro area yields have also risen to their multi-year highs.
For example, like 10-year bond yields are around 335 currently, which was last we saw was in 2011, I think. The Euro swap yield are slightly better off in the sense like they're close to the level seen in 2023, when if you remember, there was aggressive mortgage-related paying that had pushed swap yields higher and swap spreads wider. Now, even though yields are optically high, we find them only modestly cheap.
Recent moves in bond yields is fully explained by change in monetary policy pricing. Additionally, I think the intermediate and the long-end has also been driven by developments in the US and Japan. I highlight that US yields will continue to drive Euro area yields in my mind.
While the beta could be weakening, it is still positive, and thus we have been looking for ways to position for some retracement in bond yields, but only via options and maybe versus cross-market versus treasuries. On the curve itself, I think the dynamic of the curve has been interesting. In the initial part of the war, in the first few months, the two-stance curve, for example, had exhibited a strong bear-flattening bull steepening dynamic.
However, this relationship has weakened significantly over the past two to three months. I have a strong conviction on the curve bull steepening from here, but believe that the curve can continue to be choppy and stay in a tight range in a bearish move, exhibiting basically very limited directionality. So not so strong conviction on two-stance going forward, especially in a sell-off.
On the other hand, the long-end, the 10-30s curve has been exhibiting a very strong and consistent negative relationship versus yields over the last several months. We do have a steepening bias on the 10-30s curve, but that primarily reflects our bullish duration bias. So if we maybe just think about swap spreads, and despite the moves and the outright level of yields, German swap spreads have been pretty range-bound with limited volatility.
I mean, what do you think explains that? And do you think this range trading in swap spreads can continue? Swap spreads have been remarkably stable and relatively immune to all the recent market drivers.
For example, bond spreads have moved in like a one or two basis point range over the past month, even though macro drivers such as ECB pricing, yield itself, volatility, and in general, broader risk sentiment have all shifted around a lot. As we've discussed in our items, German swap spreads nowadays do not really act as a risk-off instrument anymore. So the interest from communities investing in German assets as a risk-off has been limited.
They are now, in my view, driven more by technical factors such as seasonality around swap issuance, for example, in the 10-year sector. But I think these technical factors don't really have the capability to push spreads out of their recent ranges, at least over the near term. I believe that this range trading dynamic will continue on for the next several months, and investors should be more tactical in expressing swap spread views and also expect small moves, especially in the front to the intermediate sectors.
Now, Francis, let's shift focus to the UK. There has been a lot of focus on 10-year and 30-year yield, which have reached multi-year highs earlier in the week. Is there a UK-specific factor behind these moves?
I think the simple answer is no. I don't really think the recent sell-off in 10-year and 30-year is just UK idiosyncratic factors. I mean, to bear in mind, we have seen front-end yields rise, although they have subsequently retraced recently in the last day or two, with the sell-off reflecting increased BOE rate expectations given energy price dynamics and particularly the rise in UK natural gas, which is well above the levels seen at the start of the Middle East war.
And that broadly mirrors what we've seen in front-end break. So part of the intermediate yield move is this front-end move. If we then look where we are in terms of 10-year itself, I mean, yes, it did reach the highest level seen since 2008, just above 5.2% earlier this week, all rallying back to around about 5.10%.
And I do think there are global factors here in the intermediate sector. I mean, if we look at our model, 10-year yield do look slightly cheap relative to the moves in front-end yield. So they have sort of slightly underperformed in the sell-off and adjusting for moving 10-year treasury yields as well.
But there is a very strong correlation in the intermediate sector between UK and particularly US yields. And I think that strong directionality can persist, particularly in the short term, as we go through the US inflation data, we have the US treasury long-term buyback operation as well. I think some of these factors can just spill over and continue to drive the intermediate part of the UK curve.
I mean, as you mentioned, yes, there's been increased media focus on what the impact of high yield will do on fiscal headroom. Clearly, that's becoming more relevant as the October, late October budget approaches. And probably if you just took a snapshot of yields now relative to where they were at the last budget, and if you were to put that through, I guess the OBR sort of forecast numbers, probably the overall budget headroom has come down from the 22 billion or so in the last budget to roughly around 13 billion.
So mechanically, there's an impact, but I don't really think what we see in terms of the move in UK yields is really a fiscal story or repricing a fiscal expectation. And we can kind of see that as well if you look at the curve. I mean, the two-ten skill curve has flattened modestly over the past couple of weeks.
Again, when we look at the models, probably it's a little bit too steep when we adjust the level of front-end rates and the US Treasury curve. And yes, that sort of relative steepness has increased slightly, but I think that there's a lot of moving parts here. We've seen a decline in the strength of the directionality of the UK curve to front-end rates and an increase in the directionality of the UK curve to the dollar curve.
So I think some of this sort of relative steepness, as I said, it's very modest, maybe reflects some more of these global factors. It maybe reflects this kind of shifting sensitivity of the UK curve to the dollar curve, and maybe the background sort of underlying factors here around sort of increased growth, resiliency to the energy price shock, just higher real interest rates globally from some sort of potential hyperscaler crowding out of issuance, maybe increased uncertainty given a more activist US Treasury. I think all of these combining to sort of drive global intermediate rates, rather than looking at the UK and saying there's clear dislocation for drivers from a pure UK fiscal standpoint.
So again, similar to what I mentioned for 10-year yields, I think probably we could see ongoing sort of choppiness in the dollar curve as we go through the next couple of weeks, spilling over into the sterling curve. And maybe we still need to get a lot closer to the UK budget before really trying to assess whether there's any change in sort of UK fiscal risk uncertainty. So that's all from us.
Thank you for listening and stay tuned for more updates in fixed income space here on At Any Rates, J Morgan's global research podcast series. Its communications provide information purposes only. Please read J Morgan research reports related to its contents, more information including important disclosures.
Copyright 2026 J Morgan Chase & Co. All Rights Reserved. This episode was recorded on the 4th of September 2026.
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