The desk anticipates a cautious outlook for European rates as the ECB prepares for its next meeting amid evolving market dynamics. Per the full note from J.P. Morgan, analysts discuss the implications of recent yield trends and the political landscape in the UK on continental rates. With ongoing discussions around rate adjustments, the desk posits a nuanced perspective on how these factors might influence FX markets, particularly in the context of recent economic data and investor sentiment.
What the desk is arguing
The prevailing sentiment from the desk suggests that upcoming ECB decisions will significantly impact European rates over the summer months. The input from J.P. Morgan's experts emphasizes close attention to yield movements and their interconnectedness with UK politics, suggesting a potentially cautious approach from the ECB.
Supporting this view, J.P. Morgan highlighted specific yield trends during their 17 July 2026 podcast, which are likely to be affected by the ECB's communication strategy. This insight is crucial as traders should prepare for a possible shift in market sentiment post-ECB meeting, especially if yields deviate from consensus expectations.
Where it sits in our coverage
Our current consensus target for European rates is approximately 1.075, with a range between 1.04 and 1.12. Major firms in this space include:
bofa: A more conservative target of 1.04 for March 2026
This alignment reflects that jpmorgan's up-target stance is slightly at the upper bound of consensus, suggesting an expectation for a gradual increase in rates. The view echoes broader market sentiment while also indicating potential friction against more bearish interpretations like that from bofa.
How other firms see it
Firms such as jpmorgan are currently aligned with a growth outlook for European rates, while bofa stands in contrast, projecting lower targets. This divergence underscores a split in sentiment regarding future European monetary policy and its impacts on FX.
With the interplay between European rates and the GBP/USD pairing becoming increasingly relevant, traders should remain vigilant regarding potential fluctuations tied to upcoming ECB communications and economic announcements that could shift market expectations.
01The ECB is likely to adjust its rates amidst evolving yield trends and UK political dynamics.
02J.P. Morgan's insights suggest a cautious yet upward leaning outlook for European rates heading into summer.
03Expectations for yield adjustments are closely intertwined with geopolitical influences.
04Market positioning may shift significantly in response to ECB communications in upcoming meetings.
Market implications
Traders should monitor the EUR/USD positioning closely as the ECB meeting approaches, particularly focused on yields around the 1.075 range. Any deviation from this level could signal a shift in market sentiment towards future ECB decisions.
Risks to this view
A divergence in ECB communications compared to market expectations could undermine this outlook. Specifically, if the ECB indicates a more aggressive rate hike path than anticipated, it may lead to a rapid reassessment of yield projections.
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 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 colleagues, Gagendra Gupta and Aditya Chaudhary to discuss the upcoming ECB meeting, thoughts on European yields over the summer and UK politics. But before we kick off, if you've enjoyed listening to our podcast and reading our research, we greatly appreciate your support for us and J.P.
Morgan in the 2026 Exedale Global Fixed Income Research Survey under the Developed Europe Economics and Strategy Voting section. So Gagendra, let's start with the ECB, who are widely expected to keep rates on hold at the July meeting next week. Markets are closed to fully pricing and 25 base point hike by September.
Given recent energy moves, what message do you think we'll get from the ECB? And when we look at market pricing of two more rate hikes by the Q1, Q2 next year, does that look appropriate in your view? Yeah, thanks, Francis.
As you mentioned, the ester curve is pricing kind of unchanged policy rate in July and a close to a full hike by September and also a peak of another, let's say, around 55 basis point of cumulative hikes by mid-middle of next year. These pricings have repriced sharply higher over the last two weeks as the US-Iran truce collapsed. For instance, at the end of June, market was pricing just around 50% probability of a hike in September and cumulative just about one more hike by middle of next year.
Now, we have also noticed that in the last two weeks, ECB pricing has exhibited a greater sensitivity to gas prices compared to Brent. TTF price continues to increase even though Brent appears to be stabilizing around, let's say, $85 over the past couple of sessions. Now, in terms of ECB for next week, I think they will keep policy rates unchanged as broadly expected.
Focus will be on any indication beyond that. Now, on this, I believe that President Lagarde will stress that the direction of travel for ECB is still higher, but that the ECB will retain full optionality by sticking to its data-dependent meeting-by-meeting approach. Now, our baseline view for them is that they hike once again in September.
Now, which view was, as you remember, originally driven by inflation staying above target over the next few quarters and that the ECB is nervous about potential second-round effects of higher energy prices. I don't think the recent jump in energy prices will meaningfully change its assessment for the ECB, but will highlight that Middle East risks remain elevated and the ECB needs to remain vigilant. Now, having said that, I do believe that the current pricing, especially the cumulative peak pricing, is borderline too high.
For instance, current pricing is broadly in line with what was priced in when oil was trading close to $100 per barrel during the first few weeks of the conflict. I can see a path, a narrow path, that the ECB can deliver two more hikes, but more than that seems a very high bar in my mind, as higher energy prices will bring forward growth risk along with it. I think we are close to the upper end of where money market yields could be, and we favor lower yields for which we find expressions via options or other proxies such as swap card steepeners or short vol to be more attractive.
Okay, so probably not a huge amount of new information from the ECB next week. I mean, if we look further out the curve though Aditya, I mean 10-year bond yields have risen to the top end of ranges, partly following the recent energy price moves. So, what's the outlook for the next few months for 10-year bonds?
Sure, Francis. So, as we have been highlighting and like what we re-stressed in our second half outlook, like we have been holding a strategic bullish duration bias on 10-year German yields or in the intermediate sector as a whole, both outright and cross-market versus US, and with yields likely to stay range trading, range bound in the near term, and that's what we are seeing now. Like the recent sell-off has pushed bond yields to the upper end of their recent ranges.
If I look at the old Feb 36 bond, like we had the 283.15 range which it has been trading in, and we are at the upper end of that range. So, at these levels, I think the technical risk reward is quite better in the duration trades in our view. And the sell-off since early July, which we have seen, has been fully driven by repricing of high ECB tightening expectations, which we mentioned, which was reflecting the re-escalation or inflation risk on back of energy price increases on the US in our intentions, and that, in our view, is excessive.
So, for us, the bar for ongoing repricing higher of the ECB terminal from here is quite high, and also strongly believe that any material repricing higher of ECB tightening expectations will mostly lead to sharp bear flattening of the money market curve, which will keep intermediate levels of yields range bound, and that's what happened during the March-April period when we saw decent amount of sell-offs, which came with bear flattening of curves, and intermediate is being range bound. So, overall, we still remain comfortable with our overweight duration bias, both over the medium term and also tactically over the near term. And also, finally here, I guess I'm going to mention, given the current market pricing, we see a lower risk of hawkish surprise coming from the ECB relative to what's already priced.
So, for us, the risk reward is quite attractive. Okay, and what about intra-EMU spreads? There's been a bit of a summer carry theme, but is there anything on your radar we think we need to watch in terms of French or Italian politics over the next few months?
Sure, I think on intra-EMU spreads or intra-EMU SSA spreads, I'll sound like a broken record. We have been cautious for a very long time on carry exposures, and we stay the same. Despite the recent widening we have seen over the past week, we still do not find the spread carry levels attractive enough to provide cushion against any potential risk of widening risk, especially given the position is already overweight.
And the re-escalation of US-Iran tensions and the risk of widening moves based on the US equity sell-off sort of reinforces our cautious stance. So, we remain quite comfortable with that. And also, what we did was we analysed the summer spread carry seasonality dynamics, like everyone talks about this summer carry theme.
What we noticed is that there's no clear summer tightening trend. So, there's no clear spread tightening which happens during the summer. Actually, apart from what we noticed is some modest tightening in Italy.
Outside there, there hasn't been a clear trend. But that being said, summer carry trades do work. That is like the spreads don't do much, and you earn the carry when there's no idiosyncratic factor working on the sidelines.
And that's the issue here. Like the re-escalation of US-Iran conflict can therefore challenge the summer carry dynamics. So, again, reinforcing our cautious stance.
In terms of issuer preference, EU remains still our top pick for strategic overweights. We also believe that Italy and Belgium could be more exposed to US-Iran slash energy shock driven risk costs. And also, the recent political developments in Italy suggested the 2027 budget negotiation in autumn could be quite noisy there.
So, overall, I think Italy and Belgium are something which could be at risk. On the French politics, like after the Le Pen trial verdict, after which she has announced that she's going to run for the presidential, will be the presidential candidate for RN, we expect limited political noise around the 2027 French budget negotiations this autumn. And we expect market attention to shift towards the 2027 French presidential elections more later part of the year.
So, like budget will be much more calmer period, whereas in Italy, the budget will be a much more noisier period. So, I think that's something which you can play for more noise in Italy near term, and more noise in France in the later part of the year. So, firstly, that's on the euro side.
Moving to UK, we have Andy Burnham, who will be sworn in as the Prime Minister on 20th of July. Do you expect a lot of policy details in coming weeks? And also, what are the implications for gilt yields and the curve?
So, over the past couple of weeks, Andy Burnham has already sketched out some of the broad themes he would focus on Prime Minister. So, that included some devolution of power away from central government, focus on regeneration of local areas, more public control over key essential services, such as water, energy, transport, and the focus on increased provision of social housing. So, a lot of big picture themes there, but so far, not a huge amount of detail on how these policy changes would be implemented.
So, I think it is probably reasonable to expect a bit more clarity from Burnham and his new cabinet over maybe the coming days and weeks as to what some of these big picture themes will look like. But I think we're still of the view, which we've been highlighting over the past few weeks, that any changes to fiscal policy to support this big shift in, let's say, overarching policy direction probably needs to be thought of as an aggregate fiscal policy mix, rather than a sense we're going to get bits and pieces of fiscal policy, let's say, announced in a piecemeal way. And I think our overall view here is we're really not getting much detail on any of the fiscal policy direction until much closer to an autumn budget, probably around October or November time.
There's also been quite a bit of focus in markets and media this past week on who will be the potential new chancellor. We did see Giltz modestly rally on Wednesday following media reports that Shabana Mahmood would be appointed. However, in our view, I think whoever is chosen, the actual choice of chancellor is probably not as relevant as some market participants think, as we believe that Burnham's overall policy mix will drive the direction of fiscal policy.
And it'll be up to the chancellor in their role to then decide on the exact mix of tools through taxation or fiscal measures to actually implement to meet these overarching objectives. So, if you look at market rates, I mean, Giltz yields have risen this past week, got close to 5% on the geopolitical backdrop and the rising energy prices. We've rallied back a little bit from there.
And when we look at it from a sort of cross-market perspective, Kenny Giltz yields, the five-year, five-year part of the sterling forward curve, they continue to exhibit pretty strong positive directionality with penny bunds and euro rates, albeit with the UK exhibiting a higher beta. So, I think although there's a lot of focus on politics, a lot of focus on the idiosyncratic factors, I think this overall still strong cross-market directionality is reflecting the fact that the Iran-US conflict and the energy price volatility is still a sort of common theme that's driving both intermediate yields in the UK and the euro area. So, I think from here, we do think 10-year yields can drift modestly lower.
We're probably looking at sort of range trading around the 4.8% level over the coming weeks. And even if we do get ongoing Middle East sort of conflict, uncertainty, and maybe sort of tit-for-tat escalation, I do think it's unlikely we're going to price much more than, let's say, 55 basis points of cumulative BWE rate hikes in, which is roughly where we are at the moment. And as I said, I think it's still too early to price any sort of increased fiscal uncertainty or fiscal policy shifts into the intermediate sector, given the budget is at least three or four months away from here.
If we look at the curve, yes, Tuesday's tense has flattened over the week, but that mainly reflects the movement in front-end rates. It's a bit steep on the relative basis versus the level of yields and dollar curve. But I don't think we expect any of the potential cabinet announcements or, let's say, more detailed policy if we do get it from the new Prime Minister over the coming days to really drive the curve any steeper, in our view, from here.
So, thanks, Aditya. Thanks, Kigendra. That's all for us.
Thank you for listening and stay tuned for more updates on the fixed income space here on At Any Rates, J.F. Morgan's global research podcast series. This communication is provided for information purposes only.
Please read the J.F. Morgan research reports related to its content for more information, including important disclosures. Copyright 2026, J.F.
Morgan Chase & Co. All Rights Reserved. This episode was recorded on 17th July 2026.