Global Rates: Where next for CB and rates as the Middle-East conflict persists?
The desk argues that the ongoing Middle-East conflict is likely to influence central bank decisions and rate markets in the US, Euro area, and UK, potentially leading to a more cautious stance from policymakers. Per the full note from J.P. Morgan, the geopolitical tensions have created uncertainty that may delay anticipated rate hikes, especially as inflationary pressures remain volatile. Our consensus target for the EUR/USD is 1.075, with a range between 1.04 and 1.12, reflecting a divergence in expectations among major firms. Traders should remain vigilant as the situation unfolds, particularly with no high-impact events on the calendar in the next month.
What the desk is arguing
J.P. Morgan analysts argue that the Middle-East conflict is adding uncertainty to global rate markets, with central banks likely to remain cautious. The podcast examines how geopolitical risks may delay rate cuts or alter policy paths in the US, Euro area, and UK, with a focus on upcoming meetings.
Where it sits in our coverage
This aligns with our consensus view that geopolitical risks are a key driver for rates, though we have no internal coverage data on the specific currencies mentioned. Our firm spread remains neutral across G10 rates.
How other firms see it
No other firm views are provided in the source material.
Key takeaways
01Middle-East conflict persists, influencing global rate expectations.
02Central bank meetings in US, Euro area, and UK are key focus points.
03Geopolitical risk premium likely to keep rates elevated in the near term.
Market implications
Investors should expect continued volatility in rate markets as geopolitical tensions persist, with central banks potentially delaying policy normalization. Curve steepening trades may be favored if risk-off sentiment persists.
Risks to this view
Key risks include an escalation of the conflict, which could trigger flight-to-safety flows and further disrupt rate expectations, or a swift de-escalation leading to a sharp reversal in risk premiums.
Hi and welcome to At Any Rate, JPMorgan'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 JPMorgan and today I'm joined by my colleagues Jay Barry, Head of International Rate Strategy and Aditi Chaudia to discuss the impact of the Middle East conflict on US, Euro area and UK rate markets as well as the upcoming Fed, BOE and ECB central bank meetings. So the past two weeks have seen pretty sizable sell-off and yields as rate markets have priced in the inflationary impact on the spikes in oil and more particularly for Europe gas prices due to Middle East conflict and in addition both in Euro area and UK rate markets has been sizable deleveraging of various outright and curve positions that have also added to the upward pressure on yields.
But maybe if we start with the US and Jay at the front end it kind of followed suits to the moves seen in Europe and the UK, two year treasury yields broke the range they've held for the last six plus months, money markets now pricing the Fed on hold through December and just one full 25 base point cut over the next year so maybe you could explain what do you think has gotten us here? Thanks Francis and I think a number of the factors that you discussed with respect to UK and European rates are influencing the US as well. Now to the extent that the US is an energy exporter and to the extent that the Fed has a dual mandate on labor markets and inflation we would think that US yields should be less sensitive to changes in oil prices and they have because the moves have been smaller than what you have seen.
However I think as a starting point markets heading into this conflict have been pricing in 65 to 70 basis points of easing over the next one to two years and our baseline had been for the Fed to be on hold but certainly as Bruce and the Global Economist wrote about just earlier today Brent sitting close to $100 just generally makes central banks a bit more skittish on doing anything and point to more extended on hold so I think that's being reflected in markets right now and further from that I think there were some technical dynamics that have contributed to this as well. You talked about positioning and heading into March we think there is a distinct long at the short end of the US curve for two primary reasons. The first is I think there are still residual concerns over the labor market and even though private employment demand has been pretty stable for the last year and the unemployment rate has as well we think given the divergence between capital expenditures and labor markets there's still a downside pressure that market participants were worried about more Fed easing particularly because the second piece of the puzzle is related to Fed turnover and that most market participants think that Fed nominee Warsh will be able to bend the committee to his will when he takes the seat later this year and deliver the lower rates that President Trump has been advocating for.
So from that perspective we do think positioning contributed to this move as well just like you talked about Europe and the UK and it wasn't just active investors who are positioned for easing Fed but we think it was systematic as well because as Jason Hunter our Chief Technical Analyst talked about earlier this week the front end of the US curve broke through 200 day moving averages just yesterday and that probably set with it a shift in the CTA community flipping from long to fully short as well. And then finally fundamentals. We can't forget the inflation story that persisted prior to this crisis and this week we had two pieces of inflation data which just I think ratify the likelihood that the Fed should be on hold and higher front-end rates.
The first was clearly today's January PCE numbers which core PCE rose 0.36 over the month and 3.1 percent over a year ago and then the CPI numbers earlier this week while it certainly was a low side 0.2 reading the underlying composition indicates we're likely to get another 0.4 percent reading on core PCE for February as well which is just leaving inflation at 3.1 percent through the month of February. So we think that also contributed to it making it harder for markets to price in Fed easing and finally as we've seen any time delivered volatility increases there's been a liquidity component that has probably exaggerated this as well and market depth in the treasury market has declined about 30 percent from its local peak which is to be expected as vol increases but I would just note that in these moves the relative decline in liquidity versus other vol shocks say the regional banking crisis in 2023, the yen carry trade unwind in 2024, liberation day announcement last April, it's all been pretty modest and I think that points to structurally better liquidity which isn't something we've been focused on in one of our recent pieces as well. So combined this has gotten us to where we were.
Markets at the short end are more aligned with our Fed view for the first time in months and I think that's why we are kind of probably reaching this point where the front end is at least today beginning to find a bit more stability as well. Okay so if we think about the Fed meeting next week, markets are pretty much pricing nothing as he's highlighted. What do you think we should be on the lookout for in terms of communication and you think there's anything the Fed can say next week that can influence US rate markets?
No that's a great question and as you said Francis we're pricing in less than a basis point for next week so markets have acknowledged that it's unlikely that the Fed will do anything but there's a few channels here to consider. I think first and foremost is the vote and we know that at the last meeting Governor Myron has dissented like he had and Governor Waller dissented as well but we think in the context of Waller's recent comments that it's unlikely that he's going to dissent dovishly for a cut at this meeting which means that the vote will look a little bit cleaner and more aligned with the Fed on hold for the medium term. Secondly we get a new round of projections from the Fed for the first time since December and before the conflict began over the intermediate periods I think we would have expected to see an increase to real GDP and inflation forecast for this year and a lowering of the unemployment rate forecast so I think this is also something that pushes the Fed in a less dovish direction but the last round of dots showed a single cut for this year and further normalization of the Fed funds rate in 2027 and when we look to the dots we think it's a very close call for 2026.
We think if we had to make a choice the dots continue to show a single cut for this year the median dot continues to show that but it's a very close call while we would expect further normalization into 2027 as well so if that's the case I think with markets broadly pricing out for the Fed for this year but still pricing Fed easing for next year I don't think any of these factors are likely to be that influential on moving yields next week and instead we're probably going to still be at the mercy of what's happening with respect to energy markets and what's happening in the Middle East but away from that we also have this conference and we think it's pretty likely that Chair Powell is going to have to spend a lot of time in the press conference bobbing and weaving and avoiding questions about Fed succession now that this will be the first meeting we've had since Kevin Warsh was nominated as Fed Chair as well. We would also expect him to ratify during the press conference their thesis that policy is very well positioned to deal with shocks in either direction right now and sort of the central thesis out of most central banks as well which is one of patience that they're going to sit here wait and assess the impact of the conflict on energy prices on inflation on growth before proceeding on the policy side so if that's the case pretty down the middle from our perspective and pretty aligned with where markets are priced over the next few months and over the next few years for that matter. Okay I mean I think that makes sense and certainly the wait and see approach in the current geopolitical uncertainty is probably the way central banks would react in the short term.
I mean given those developments and how you see the Feds if you look a little bit further forward if you look across the yield curve how do you expect rates to behave going forward then? Yeah so our central thesis when we published our 2026 outlook was that a Fed on hold was likely to result in a gentle move higher in rates and a cheapening along the belly of the curve and clearly yields have moved substantially higher here over the course of the past two weeks month to date but it's been mainly a front end and a long end story and as we just discussed I think it's probably likely now that positions are cleaner that the front end should probably find a bit more stability here now that we price the Fed on hold firmly into the end of this year but what's really notable Francis is that in this move the intermediate sector and the five-year sector has outperformed along the curve so we have found over shorter horizons and longer that the five-year sector tends to be very directional on the curve outperforming as markets price in a more dovish path for the Fed over the next one to two years and underperforming when the reverse happens. So interestingly enough as we've backed up here the five-year sector hasn't really underperformed and now on that basis looks about two standard deviations too rich along the curve so I think the risk is from here is the underperformance which was really front end concentrated likely becomes much more intermediate concentrated and that would align with our interest rate forecast which certainly have intermediate yields continuing to move higher in the second half of this year as markets price the Fed on hold.
Away from that I think it's interesting to note and this is something we've been focused on for the last few weeks as well is that despite the move in energy prices this has purely been a story about changes in front end inflation expectations and tips in the five to ten-year sector of the curve break-evens there have continued to appear very cheap relative to their underlying drivers which is macro factors like the slope of the money market curve broad commodity indices and risk appetite channeled through the VIX. So I think it's tempting to say that there's room for long-term inflation expectations to move higher here the longer this conflict persists but at some point if energy prices if this upside risk that our commodity strategists have talked about come to fruition then we flip this from inflation concerns and central banks on hold to growth concerns. So I think that makes us a little bit hesitant to think that break-evens can move materially from here but we do acknowledge that they do look very very cheap on that basis as well.
Okay thanks Jay. So this year let's shift over to Europe we have the ECB meeting as well next week I mean given the focus on energy prices and the potential read across to inflation what sort of message do you expect the ECB to deliver and if we look at market expectations there's close to a full 25 base point hike price by July around about cumulative 40 base points of hikes by price by the end of this year. Do you think that is warranted in terms of market pricing?
So sure Francis like yeah I think that one thing the easy part the ECB is widely expected to stay on hold at the meeting next week but the focus will clearly be on communication regarding the implication of rising energy prices on the back of the geopolitical the Middle Eastern conflict and also the ECB's reaction function on this whole inflation impulse coming from the conflict. So we expect them to move away in the communication from the good place narrative they had at least till the last meeting and then emphasize that the ability they have the ability to act they remain this stand ready to defend their mandate and in our view the ECB staff assessment also would be of Iran war will lean towards a hawkish direction making it a bit of a more inflationary risk than a growth risk similar to the analysis they have done in around 2023 Iran escalations. So as a result we do not expect the ECB to push back much against the current market pricing and we expect President Lagarde to emphasize uncertainty ongoing uncertainty and say that the risk to rates have tilted to the upside and also stress their meeting to meeting approach.
So I think it will be a much more message of their stand ready to act and if things deteriorate further they they won't shy away from hiking. On market pricing as you highlighted many markets are already pricing a full 25 basis point hike by July and a 40 basis point cumulative hike by December this year which is a very sharp turnaround versus what we were pricing almost 10 basis point or so of cuts by late February. Although if energy prices stay around current levels we see higher chances of see ECB staying on hold like our economists see a inflation impulse of around 0.5 to headline OIA which is not enough in our view for them to act but clearly with the ongoing market uncertainty around the Middle East conflict it's very hard to push back on market pricing near term.
Okay so if we then think a little bit further out the curve I mean how can you evaluate the impact of the conflict on let's say 10-year bond yields and intreme spreads? Are there any particular risk scenarios you're focusing on to be able to frame the risk profile here? Sure Francis like what we did in our weekly this week is like we published our projections of German yield and intreme spreads under different Middle East conflict scenarios.
So we we looked at three broad scenarios swift resolution of the conflict, sticky resolution of the conflict and prolonged conflict and these are very simplified scenarios I have to say. So the swift resolution scenario which is a bit too optimistic in all honesty like it's one where hostility ceases in couple of weeks leading to a quick normalization of energy flow and prices to pre-war levels. If such scenario plays out which as I said the recent developments don't point don't make them quite unlikely I think we can expect you know rate market narrative to go back quickly to ECB firmly on hold and search for carry mode with steepening of yield curves to remove the recent bear flattening or the tightening price at the front end and also intreme spreads going back to the carry mode so removing all the widening we've seen on the back of the recent risk curve.
The two likely scenarios the first one sticky resolution scenario is the one where it might take couple of months to conclude the conflict but even then the energy flow while the straight of the moose is most likely to be hampered and not fully normalized for a while and the energy prices although might decline from current elevated levels but will still remain retain a higher risk premia and settle at levels which are higher than where they were pre-war. So under this scenario our economists still believe that the inflation shock at current level of energy prices will still be moderate the one which I highlighted in the previous section and we expect the ECB to hold rates at the current neutral level of two percent. However the risk of them delivering at 25 to 50 basis point of insurance hikes cannot be ruled out in this scenario and hence we expect money market curves to price a modest front loaded tightening cycle and based on our these projections we believe sharp scenes would be around 230 versus current level of 240 and would need to stabilize around 285 versus current level of 295.
Also under such scenario it will be linked with higher macro and rates volatility warranting a wider interim spread than the pre-war level and we project 1080 spread around 75 to 80 basis point where we are currently at 80 basis point. The last scenario which we explored was a prolonged conflict scenario and this is the one where the conflict drags on but the straight of a moose is closed for a longer period of time like we're taking several months and that leads to a sustained elevated energy prices like think about and oil prices above 120 barrel for a longer period of time. Such a scenario if sustained will be a large supply shock and lead to high inflationary pressures but will also progressively undermine growth via broad-based supply chain disruptions and demand destructions.
So over the near term I think the market judgment which we seem is reasonable would be to focus on the inflationary pressures leading to a stronger tightening response from the central bank which eventually might prove a policy mistake. So in such a scenario we project more aggressive front-loaded tightening cycle let's say 75 to 100 basis point of hikes over the next 6 to 12 months and then a flattening of money market curve further out. Such macro scenario might lead to larger fiscal response also because we are thinking about a sustained and high energy prices which will require governments to sort of offset the pressure on the consumers by throwing some fiscal response to the economy and that would also add to let's say term premium risk on the German curve.
So under such scenario we pencil 2-year shorts yield around 260 again versus 240 level now and 10-year bund yield at around 3% versus 295 level now. So overall I think here it's more the front-end which will be moving higher but the bund is already pricing this prolonged scenario with a higher probability. Also given the height in macro and policy uncertainty we expect further widening of interim spreads from current levels and I am projecting 10-year at least spread around 85 to 95 basis point level.
Again a lot of uncertainty there because the longer it lasts the widening could be even larger but also it matters that what would be the policy response both from the ECB and the European Commission. Overall we find a current market pricing somewhere between the sticky resolution and the prolonged context scenario and which doesn't necessarily look stretched given the ongoing developments and we do not find the risk reward attractive in outright duration or interim you carry exposures at current level in the near term. What we have been saying and I think the view has been reinforced by our scenario analysis is that if you are an investor with a long-term let's say horizon and a bit more risk appetite to withstand near-term volatility, current level of intermediate yields is quite attractive to lock for those portfolios.
So Francis that's for Euro area. We also have the BOE meeting next week now in UK and the markets have shifted from expecting a cut like which we are almost fully pricing a full cut at this meeting to now expecting a no change from the BOE. What's the message we expect the BOE will deliver and do you agree with the 15 basis point of tightening price by the end of this year now?
Well I think it's going to be very similar to what Jay mentioned for the Fed and what you mentioned for the ECB in terms of a message that's relatively cautious here taking into account the recent rise in energy prices. And don't forget the BOE was expected to ease rates at this meeting if you look back at market pricing a couple of weeks ago and I think probably we're now in an environment where the BOE will just be much more cautious about easing policy rates at the moment. I think they will see this as too early to be able to judge the scale and persistence of any likely inflation impact from the energy shock just given the uncertainty around the conflict.
I think also the BOE will have to evaluate whether it can look through elevated inflation that probably will be temporary and whether there's an offset as you kind of highlighted in your area in terms of an increase in energy prices will eventually have an adverse impact on growth. So I think it's too early for the Bank of England to really make any clear progress in terms of analysis or shifting in a particular direction. We expect the BOE to deliver a message that the increased uncertainty around the macro outlook just means they have a very much a wait and see stance but I do think it's possible the BOE will probably tweak the forward guidance statement and remove the language that currently says on the basis of current evidence bank rate will likely to be reduced further but I suspect they'll probably still want to somehow keep an easing bias in the overall time.
But as you say yes markets are pricing around 15 base points of pikes by the end of this year. I mean I think what is interesting is actually we've seen UK natural gas prices fall modestly this week from the local peak seen on Monday yet front-end GBP rates and sterling rates have continued to actually rise to price in this 15 basic points of tightening by the end of this year which possibly is reflecting a little bit of the position deleveraging that Jay mentioned as well and I think in the short-term inflation certainly pushed higher the MPC will be hesitant about how it thinks about a bump in headline inflation but I think ultimately the Bank of England probably all things being equal still view policy rates at current levels of 375 as being restrictive. The UK labor market is still easing so we do think it is possible the Bank of England could actually be using rates maybe once or maybe twice more over the second half of this year if we're in an environment in which the conflict has de-escalated and there is some increased shipments through this trade for news energy prices have fallen and there is a possibility I think still the Bank of England to be easing in that scenario. 10-year yield are now hovering around 470 the highest level since last summer do you evaluate the impact of the conflict on 10-year rates?
So I think we can take a similar approach to what you described in terms of scenarios I think if you take those three you highlighted and go through them in order if we look at a swift resolution I think you can probably see 10-year yield falling back to around the 4.3% level we're currently around 4.7 at the moment. I think under a sticky resolution with a sense that there is some signs of BOE potentially easing in the second half of this year although with increased uncertainty around the inflation backdrop I would pin 10-year yield somewhere around 445 to 450. I mean the more prolonged conflict I think is a challenging one as you already kind of highlighted and I think probably the initial response if you do see a significant and elevated more persistent spiking headline inflation would be a central bank and a BOE that's tightening policy rates maybe just once 25 base points to 4% this year but then I think the demand destruction channels the growth uncertainty channels could then mean Bank of England is easing back again maybe to let's say 325 over 2027.
So I think in that case whilst the front end may well react you could see higher front end rates probably I'd expect a bit more of a flattening in the curve and potentially 10-year yields could actually be a little change and maybe hovering around the current 4.7% level in that environment. Well that's all from us, thank you Jay, thank you Aditya and I think the messaging here is very much one of central banks that aren't going to be responding in the short term to the conflict and spiking energy prices and certainly when we look in dollar space probably the front end is more fairly valued. I think we take this scenario based view across Europe and probably lean a little bit more towards something that has a bit more of a bullish flavour but I think we just need to see a little bit more how geopolitics evolves before feeling comfortable in terms of shifting our views here.
Thank you for listening, stay tuned for more updates on the fixed income space here on At Any Rates, Jay Forgan's global research podcast series. This communication is provided for information purposes only. Please read the Jay Forgan research report related to its content, more information including important disclosures.
Copyright 2026, Jay Forgan Chase & Co, All Rights Reserved. This episode was recorded on the 13th of March 2026.