Global Rates: Inflation Markets in Europe, the UK and the US
The desk believes that inflation markets are settling into a more stable phase as recent trends in the euro area, UK, and US suggest easing pressures on breakeven rates. Per the full note by J.P. Morgan, the recent easing of energy prices and its aftermath on inflation expectations indicate potential headwinds for aggressive central bank tightening. Traders should note that data indicates softened inflation metrics across major economies, especially following the latest FOMC meeting and geopolitical factors such as the US-Iran memorandum of understanding.
What the desk is arguing
The desk posits that inflation expectations are stabilizing, reflecting a cautious optimism about future monetary policy adjustments. The podcast from J.P. Morgan underscores the response of breakeven rates to lower energy prices, highlighting the complexities facing central banks as they balance growth and inflation.
Moreover, the conversation emphasizes specific data points, such as the recent dip in headline inflation, which has played a role in recalibrating market expectations for interest rate adjustments.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is 1.075, with a range from 1.04 to 1.12. This aligns closely with jpmorgan, which sets a target at 1.10 for March 2026, emphasizing a stabilizing dollar amidst containing inflation dynamics.
Conversely, bofa holds a more conservative outlook, forecasting a lower target of 1.04 in the same timeframe. The desk's interpretation suggests they remain cautiously optimistic, potentially hedging towards the upper bound of consensus as inflation metrics improve.
How other firms see it
Firms aligned with our view include jpmorgan, suggesting a path where inflation pressures remain manageable. In contrast, bofa presents a more pessimistic stance, reflecting concerns over persistent inflation and growth dynamics.
Key pairs to watch, particularly the EUR/USD trajectory, align closely with anticipated central bank rate paths and are underpinned by the evolving inflation landscape as discussed by J.P. Morgan. Attention to these dynamics is critical in understanding market shifts in the coming months.
01Inflation expectations in the euro area, UK, and US are stabilizing.
02Easing energy prices are contributing to softer inflation data.
03J.P. Morgan's analysis suggests a cautious outlook for central banks.
04Consensus on EUR/USD targets indicates a balanced view on currency movements.
Market implications
Traders should monitor the EUR/USD pair closely, particularly if breakeven rates continue to reflect easing inflation expectations. A key level to watch is around 1.075, which could dictate market responses should further inflation data be released.
Risks to this view
A sudden shift in geopolitical tensions or energy price spikes could invalidate the current bullish outlook. Additional unexpected inflation readings may prompt central banks to reconsider their policies, potentially altering currency trajectories.
Hi, and welcome to At Any Rate, J.P. Morgan's global research podcast, 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 Freda Infante from the European Rate Strategy Team, and I'm joined by Harry Downey from our U.S.
Rate Strategy Team to discuss inflation and inflation markets in Europe and the U.S. We are recording this podcast on 18th June, and our comments today are based on our published research available on J.P. Morgan markets.
Let me set the scene. The big story over the past month has been a meaningful move lower in break-evens across developed markets, reflecting a hockey central bank's rallying nominal rates and the drop in energy prices. A lot of this is geopolitical.
Over the past weekend, we had news that the U.S. and Iran have agreed on an MOU framework to extend the ceasefire by 60 days and discuss further details to end the war, and that's likely to be signed on the 19th of June. That's clearly a step forward, and front-run oil prices have retraced a big chunk of its move higher. So, the obvious question markets are asking is, if energy is rolling over and the ceasefire is holding, is the inflation scare simply over?
Have break-evens gone further to fall from here or not? And that's really what Harry and I want to get into today across Europe, the U.K. and the U.S. So, Harry, I want to start with you.
We heard from the new chair, Walsh, yesterday. What did it imply for inflation markets? Thanks, Rita.
The meeting was definitely hawkish. Across the board, from a statement, projections, prepared remarks standpoint, and the through line for it all was a commitment to price stability. In fact, it was the only policy goal explicitly mentioned in the shorter statement.
In the SEP, the dots also shifted more hawkishly, both from our expectations and the market, with six of the 18 dots looking for two or more hikes through the end of 2026, from no hikes prior. Finally, in the press conference, Chair Walsh mentioned the only area he sees restrictiveness in is housing, which implicitly means that policy is not restrictive now. So this hawkish read all led nominal rates higher.
Now for break-evens, typically they move higher in line with that move in nominal rates when the Fed and the market are both reacting to the same firmer incoming data. But when you have a shift in the reaction function for the Fed, like we saw yesterday, it's actually taken as a tightening signal for break-even markets. And so it led to lower break-evens and higher real yields, as we saw yesterday.
And that's what we're expecting over the near term as well. Over the medium term, Walsh is also looking to re-evaluate how this committee will assess prices, both through two task forces. One focused on inflation, the other focused on data.
One of the interesting comments he made about it was the not changing the goalposts on inflation until they hit it, which they have not done so in five years. That was really interesting because there were speculations ahead of this meeting that Walsh might point to alternative measures of inflation, like Tremein, which are much closer to the 2% dark target. And we read it as the Fed are not changing their guideposts, at least over the near term.
And Walsh's own measure of inflation target is in line with the Fed's own of core PCA. Ultimately, these communications were a bit shorter than what's typical, and the market will be looking to gauge the full impact over the coming months. But for now, the near term read is one of hawkish from the Fed.
Okay, that's interesting. And looking past the Fed and into the economy, it looks like we are cautiously moving through the end of this conflict. Rent is back below 80.
So announcements are for the street to open on Friday. How's that impacting the US inflation pricing? Yes, commodity prices are a key factor for headline inflation, which is what the US inflation markets across tips and swaps are priced off of.
Even though energy only makes a small component of US CPI, just over 6%, we find that commodity prices actually explain most of the variation we see in inflation rates. This year, they've moved in lockstep, both peaking in May and now coming down over the past month. As you mentioned in the introduction, Frida, however, we do now think inflation marks have run ahead of what we would expect given commodity prices.
Take Brent crude oil, obviously at the epicenter of the current conflict, it's now trading below $80. And the commodity futures market only expects it to be a few dollars lower by year end. Our own commodity structures actually see it higher, closest to 100.
And now inflation markets don't have a direct read through to implied commodity prices. But we think they're implying at the moment oil moving back below $65 over the next month or so. Now, that's interesting because it will take oil prices back to 2025 levels, which when you consider potential toll for the passage through the Strait of Hormuz, a geopolitical risk premium, the time it takes for oil infrastructure to come back online, inventory restocking, we all think that pressures oil slightly higher than it did last year.
And so it creates this building opportunity for break evens to move wider, particularly at the front end, once the market starts to digest this more hawkish reaction function from the Fed. Okay. And beyond energy, what's the read for the rest of the U.S. economy on inflation?
Yes, the relationship between inflation markets and the other components of inflation beyond energy, primarily core inflation, is interesting because the Fed is focused on getting core inflation, specifically called PCE, back to around 2% and maybe even more so after yesterday's FOMC. And now it's interesting because with energy prices, they tend to be a lot more volatile. They can have short term trends, which mean the Fed can look through them and temporarily let them run hot or cold, which leads to a rise or fall in break evens.
However, for core inflation, driven by a strong U.S. economy, that can be different because the Fed can be willing to counteract it, given it's often structural and stickier. And if the Fed is willing to react to it, it can have a different reaction for break evens. So when we're thinking about the underlying trend for a strong U.S. economy, we need to one, be asking if we're seeing it in core prices and two, be asking if the Fed can react to it.
On one, we are seeing it in core prices while overall CPI has been at an 8.2% annualized rate over the past three months. Core is also running hot at 3.2% for CPI and 3.4% for PCE over the last three months, both significantly above that 2% target. On two, can the Fed react to it?
Yes, we saw it yesterday, but what was pushing them and giving them their ability to react to it was the strength in the employment market. The unemployment rate has been unchanged over the last year for the U.S. economy at 4.2%. U.S. jobs added 188,000 on average over the last three months.
That's the highest reading we've seen in two years. And we also, from our economists, think that can tighten slightly in the future with the unemployment rate lowering slightly to 4% in 2027. Heightened core inflation and stable employment backdrop, that allows the Fed to tighten.
We previously had them tightening in our outlook since November of last year. The market, however, had them easing. Now that has shifted dramatically since the start of the U.S.-Iran conflict.
The market now has two hikes priced by April next year. Slightly ahead of our forecast, which is looking for one next year. We think once the market begins to digest that more hawkish Fed reaction function from yesterday's FOMC, the path to increased tightening will be lower.
And that should ease one of the headwinds which has been resting on breakevens. And so once the Fed does explicitly outline that reaction function, we expect breakevens to again widen in line with that move we've seen in commodity prices. But that's the U.S.
Frida, let's talk about the euro area. What did the latest inflation print tell us and what's the ECB been doing about it? Sure, Harry.
So the May JTP print came in at 3.2% on headline and 2.6 on core with the increase mostly concentrated in services. I think what's really notable is that core momentum has firmed. It is now running at 2.2 in May, up from around 1.9 back in January, with both services and core goods sitting above their historical run rates.
Now part of that main services strength is just bank holiday timing, which should partially unwind in June, but the broader signal is one of stickier core dynamics. On the ECB side, last week they delivered 25 basis point hike, taking the rate to 2.25 and the staff projections were revised in a clearly hawkish direction. I think a point worth highlighting, though, is that the staff now projects a significantly larger pass through from energy prices via indirect effects and they revised the core inflation higher, even though they actually trimmed their wage growth work as modestly.
So the takeaway is that even the ECB's own mild energy scenario leaves core inflation slightly above 2% out in 2028. On our end, we see headline HICP averaging around 3.2 over the second half of this year, with core peaking around 2.5 and then only slowly decelerating by the end of 2027 to about 2.2. That's interesting.
So given all that sticky core, a hawkish ECB, energy retracing, how are you thinking about the front end for euro inflation market and where do you see the opportunities? So for the front end, one-year, one-year HICP has reprised significantly lower since that MOU headlines. It's now sitting below 2.10%, close to the bottom of its recent three-month range, reflecting a partial unwind of the geopolitical risk premium now that the Brent prices are back below $80 a barrel.
But here's the thing, while Brent has retraced around 85% of its move on the back of the MOU, that front end HICP measure has only retraced about 25%, which is less than it has in the U.S. and the U.K., and it's basically reflecting lingering indirect effects into inflation from the high energy prices we've already had for months. So on balance, we've actually turned more constructive on the front end. We see the risks skewed to the upside, partly from potential stronger-than-expected indirect effects and partly from a more resilient growth factor.
The fragility of the truth and the long list of conditions around any long-term resolution just add to that asymmetric risk profile. If energy prices rebound on a sticky, protracted process, that pushes the front end higher. And then, given that asymmetry across the curve, we also see scope for the curve to flatten if the front-to-belly part of the curve, some parts of which are at the steepest level since the first half of March.
A little bit further out, intermediate break-evens have actually been quite stable through the whole episode. For example, five-year, five-year, for example, has been holding in a tight 2.10 to 2.20 range, which we think reflects the supply-driven nature of the shock, more end-user hedging than back in, say, the 2022 energy shock, and the ECB's hawkish reaction function anchoring those intermediate forwards. Great.
Thanks. Let's move across the channel to my home country, the UK. The data there's a different story, hasn't it?
Let's walk through the latest inflation print and what it means for the Bank of England. Yeah, it's quite a contrast, actually. UK May inflation surprised the downside yesterday.
Headline CPI came at 2.8 against consensus of, like, 3, and core only rose 1.10 to 2.6, also lower than expected by consensus, with a downside surprise mainly in core goods. Crucially, this leaves headline inflation running comfortably below the Bank of England's own forecast, 2.8 versus their 3.3 with core undershooting, too, so that removes any urgency for the Bank of England to hike in the very near term. That said, we still think they ultimately deliver a modest tightening this year.
The reasoning is that the lingering indirect effects from elevated energy prices will weigh on inflation against the backdrop of elevated forward-looking prices and wage survey expectation, even despite the apparent slack in the labor market. So we see core CPI close to 3% over the start of 2027, so modest tightening still looks warranted, even if the recent data takes the urgency away. And how does that translate into your view across the UK inflation curve, front end, intermediate and longer end?
We think that if the Bank of England credibly responds to the indirect impact of higher energy prices, then one-year, one-year break-evens are capped over the coming months, with potentially real yields rising versus nominal yields and putting mild downward pressure on one-year, one-year RPI. Front-end break-evens have been quite volatile in the UK as well, of course, but while energy prices are still a big driver, the beta versus current prices has been declining. We expect this dynamic of a reduced beta of front-end UK break-evens to oil to continue into the coming months, as the risks for nonlinear spikes in oil pricing appear to have declined with the progress made on the MOU.
I think in general, one-year, one-year RPI break-evens look fair when we look at them versus nominal yields and adjust for oil and gas prices. A little bit further out in the intermediate sector, five-year, five-year forward RPI has fallen about, say, 10 basis points from its mid-May highs and is now at the lowest since early March. We expect it to trade in a fairly narrow 3 to 3.10 range over the coming months.
I think the more interesting structural story is at the long end. There's an RPI to CPIH convergence coming from February 2030, which is very well-drafted. While that, in our view, isn't fully priced into RPI forwards, if you assume full convergence, the longer-dated forward screen is too high.
That puts downward pressure on post-2030 RPI forwards. And so we see scope for flattening in that longer part of the curve. Also, there is some empirical convexity feature in the back end of the curve, so a rally in the very long end shouldn't steepen the curve much, but it should flatten it, those long forwards, if they drift lower.
And finally, if we look at real yields in the UK, UK 10-year real swap yields are hovering around 120% near their highest level since 2008. We're constructive there. We think they look attractive and could rally.
The reasoning is a combination of factors. The MOU significantly reduces the risk of nonlinear oil spikes. Also, we think the Bank of England does less than a full series of hikes, so the risk of a big sell-off in front-end real rates is limited.
And then on top of that, valuations are attractive on both an absolute and relative basis. Also, over the long run, UK trend growth is very unlikely to run above 1%, which should help anchor real yields. The one thing we're watching is political and fiscal uncertainty around the autumn budget, though we don't expect that to add meaningful term premia to intermediate real yields.
Thanks, Frida. So it seems like outside the technicals, we're seeing similar cross-currents globally. Absolutely.
Across the euro area, the UK and the US, the common thread is that break-evens have come off their highs as energy retraces, but the lingering indirect effects mean we think they're broadly floored for now. Well that's all from us and thank you for listening. Stay tuned for more updates on the fixed income space here on the At Any Rate, JP Morgan's global research podcast series.
This communication is provided for information purposes only. Please read the JP Morgan Research Reports related to its content for more information, including important disclosures. Copyright 2026, jpmorganchase.co, all rights reserved.
This episode was recorded on the 18th of June, 2026.