Rates Spark: Asymmetric relationship between oil and rates
The desk observes an asymmetrical impact of oil prices on euro interest rates, where declines in oil do not translate to equivalent drops in rates. Per the full note , the current dynamics are reminiscent of prior cycles, particularly noting that euro swap rates have remained elevated despite easing oil prices. This supports a sustained hawkish outlook from the ECB amidst robust eurozone growth indicators. Our consensus view, while acknowledging potential economic headwinds, expects euro rates to remain resilient and elevated over the near term.
What the desk is arguing
The desk highlights an asymmetric relationship between oil prices and euro rates, illustrating that euro swap rates do not decrease as rapidly as they rise in response to changing oil prices. Per the full note , this phenomenon has been observed historically, indicating that current rates are likely to stay higher for longer, even as oil has retreated from recent highs.
Supporting this view is the fact that the euro 2Y swap rate is currently about 20 basis points higher than it was previously when oil prices hovered around the $100 mark. With the ECB maintaining a hawkish stance and eurozone PMI indicators remaining robust, the downside potential for euro rates appears limited in the immediate future.
Where it sits in our coverage
Our internal consensus target for euro rates is currently set at 1.075, with a range from 1.04 to 1.12. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s view aligns closely with the targets from jpmorgan, which supports the expectation of sustained higher rates, while contrasting with bofa, which anticipates lower rates.
How other firms see it
Firms such as jpmorgan and credit-suisse are in alignment with the desk's perspective, projecting elevated rates in the near term. Conversely, bofa holds a contrasting view, positing potential declines in rates.
In terms of market relations, the dynamics between euro interest rates and inflation will be pivotal, with a specific focus on the eurozone's inflation metrics influencing rate expectations. The euro/dollar relationship is likely to reflect these underlying rate dynamics closely.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Euro rates exhibit an asymmetric response to oil price changes, remaining elevated despite oil's recent declines.
- 02Current euro swap rates are approximately 20bps higher than past levels at similar oil price points, indicating limited downside potential.
- 03The ECB's consistent hawkish tone further supports the desk's view of elevated euro rates.
- 04Economic resilience in the eurozone, evidenced by strong PMI readings, suggests that rates will not follow oil downward quickly.
Market implications
Traders should closely monitor the euro 2Y swap rate, currently at around 1.10, as indicative of prevailing market sentiment regarding future ECB actions. The juxtaposition of robust economic indicators against potential inflation pressures will be critical in shaping trader positioning.
Risks to this view
A significant deterioration in the eurozone's growth outlook or unexpectedly low PMI figures could prompt a quick reassessment of rate expectations, possibly leading to a dovish repricing from the ECB. Additionally, if inflation readings deviate markedly from expectations, this too could catalyze a shift in market sentiment.
Articles Rates Spark: Asymmetric relationship between oil and rates Published 17:15 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets are following a similar pattern as before, which means euro rates don't follow oil back down as quickly as they followed on the way up. This limits the downside potential we see for euro swap rates in the near term. Slowing growth could push back against hawkish pricing, but in our baseline we see eurozone economic resilience Michiel Tukker With oil prices easing of late, euro rates have not followed back down as quickly Asymmetric reaction to oil keeps rates higher Oil prices have eased from the recent highs, but the short end of the euro curve sticks to a relatively hawkish outlook.
The last time oil hovered around $100, the 2Y swap rate was some 20bp lower. This is a familiar pattern, whereby up and down movements in oil have an asymmetric impact on rates. When oil prices hit new highs, the inflation impact leaves a lasting impact on inflation expectations, limiting the rate moves on the way down.
The asymmetric oil impact means the downside to euro rates could be limited over the near term. The European Central Bank keeps striking a hawkish tone, which supports the steep hiking profile. Also, the growth outlook remains robust, with eurozone PMIs mostly above 50 points.
Having said that, we do anticipate some economic headwinds on the back of higher oil and gas prices. But given the resilience thus far since the start of the Iran war, our baseline remains for the economy to remain robust in 2026 and 2027. A worsening growth outlook could, however, be a catalyst for a dovish repricing, but also not immediately.
Even if we were to see disappointing PMI figures for the eurozone this week, the focus is on inflation. That doesn’t mean we can just ignore growth dynamics. The big fear for central banks is that higher inflation materialises through accelerating wage growth.
A weakening growth outlook would mitigate this risk. Having said that, the very positive sentiment – see almost record equities – will limit markets’ sensitivity to one-off downside growth surprises. Wednesday’s events and market views The highlight will be country PMIs.
The eurozone composite index is expected to tick slightly lower, but remain well in positive territory at 51.7. Consensus also sees relatively strong UK and US PMIs, both well above 50. In primary markets, Slovakia will syndicate a new 10Y SLOVGB for an estimated €2-3bn.
Germany will auction 21Y and 30Y Bunds totalling €2bn. From the US, supply includes a 2Y FRN for $28bn and a new 5Y Note for $70bn. 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. Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article Asymmetric reaction to oil keeps rates higher Wednesday’s events and market views
Sources & References
How we cover this story