Rates Spark: A Fed hike could shake sentiment
The desk interprets the recent research from ING which suggests that even if the Federal Reserve holds rates steady, the market still prices a 30% chance of a hike that could disrupt sentiment in the short term. This uncertainty might lead to upward pressure on EUR and GBP front-end rates, reflecting a hawkish tilt that could result in further positive positioning in European rate markets. However, should the Fed proceed with a hike, tighter financial conditions could dampen positive market sentiment and impact risk assets. Per the full note source, longer-dated rates may struggle to maintain their upward momentum in such a scenario.
What the desk is arguing
The thesis posits that the impending Fed meeting carries significant implications for market sentiment, regardless of whether the FOMC decides to hike rates or not. The desk frames this as a potential catalyst for volatility, given that both a hold and a hike could push rates higher, depending on the narrative delivered by Fed officials, particularly if hawkish tones are evoked.
In terms of supporting evidence, the commentary highlights a 30% probability of a rate hike, indicating substantial market hesitance, particularly as global rates have already seen a notable rise, with a reported 50 basis points added to nominal 2Y swap rates recently. This reflects a market increasingly sensitive to the Fed's next moves.
The alternative read would be if the Fed surprises with a dovish stance, possibly leading to a decline in short rates and easing of long-term rate pressures, which could bolster risk assets like equities relatively unscathed.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets are pricing a 30% chance of a Fed rate hike, which could influence EUR and GBP front-end rates.
- 02A hawkish Fed narrative could support upward momentum in shorter-dated rates, despite potential resistance in longer maturities.
- 03Tighter financial conditions could provoke a risk-off sentiment, particularly impacting equities and other risk assets.
- 04Heightened real rates have already contributed to increased nominal swap rates, by approximately 50 basis points recently.
Market implications
Watch for EUR/USD around 1.1419 as market sentiment reacts to the Fed's decision, with any hike potentially challenging the upside momentum in rates. Additionally, anticipate market positioning shifts leading into the meeting, particularly for short-dated instruments.
Risks to this view
The call could be invalidated if the Fed takes a surprisingly dovish stance, leading to a sell-off in short rates and a flattening of yield curves, which could undermine the current hawkish sentiment and trigger losses in risk assets.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Nomura | Bullish | 1.2000 |
Lloyds Bank | Bearish | 1.1200 |
Rabobank | Bearish | 1.1400 |
Articles Rates Spark: A Fed hike could shake sentiment Published 07:15 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We don't think the FOMC will hike rates, but markets see a 30% probability that it does. The front end of the EUR and GBP markets can move even higher on a hawkish tilt. Longer-dated global rates, however, could find resistance to follow through, especially if the positive market sentiment gets challenged by a tightening of financial conditions Michiel Tukker We expect the Federal Reserve to remain on hold today, even though it has turned more hawkish Fed will surprise, and global rates should watch Global markets will be bracing for the Fed meeting as we’re bound to have a surprise, but the direction remains up for debate.
Markets seem to settle at around a 30% probability of a hike, which means both a hold and a hike should push rates around. The narrative around the decision matters too, especially the role Fed Chair Warsh will take if chosen for a hike. He might not endorse the move but simply deliver it.
Also, EUR and GBP markets should keep an eye on the aftermath of the Fed, as its recent hawkish turn has had clear spillovers in the form of higher real rates elsewhere. Oil prices, alongside inflation expectations, remain the biggest daily rate drivers, but a rise in real rates has also contributed some 50bp to nominal 2Y swap rates over the past months. And with sentiment choosing to take a positive stance on the economic outlook, European rate markets can probably still permit an even more hawkish positioning.
We could also imagine a scenario where market sentiment takes a hit if the Fed hikes as risk assets suffer from tighter financial conditions. Already we’re seeing increasing jitters in equities on the back of AI uncertainties. In this case, the curve reaction should be of interest.
Shorter rates would be pushed upward, but longer rates might find resistance to follow. In this case, the positive global growth outlook could be challenged. Expect flatter global curves in this outcome.
Wednesday’s events and market views The Fed meeting later today will be the highlight. From the eurozone, we have the ECB’s wage tracker report, which over time should help assess the risk of second-round inflation effects. Germany will auction €6bn 10y Bund, while the US will auction a new 2y FRN with a total size of $30bn.
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.
Sources & References
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