Rates Spark: Curve influencers
The desk identifies shifting dynamics in interest rates as a pivotal influence on foreign exchange rates, particularly driven by oil prices and rising real rates. Per the full note from ing-think, the recent statements from Fed Chair Warsh indicating a potential for increased hikes have altered market expectations significantly, with a shift from 50:50 to 3:1 in favor of a 25bp hike in the September FOMC meeting. This scenario suggests a likely upward trajectory for USD against currency pairs like EUR/USD and GBP/USD toward the end of 2026. The consensus target suggests an average position doesn't fully reflect the hawkish narrative, potentially setting the stage for a stronger USD if current trends hold.
What the desk is arguing
The desk frames the changing landscape of rate expectations due to comments from Fed Chair Warsh and Treasury Secretary Bessent as crucial for forecasting FX movements. The shift in probability for a September rate hike indicates that market participants are starting to price in a more hawkish Fed stance, which could catalyze USD strength versus EUR and GBP.
Key data points suggest that ongoing upward pressure on real yields reflects market sentiment more than inflation concerns, with the 10-year yield continuing to climb despite easing break-even inflation rates. This move indicates a structural influence on the yield curve, favoring a dovish outlook for the EUR/USD and GBP/USD, and thereby influencing short-term positions against the backdrop of oil pricing dynamics.
Where it sits in our coverage
For EUR/USD, our coverage consensus target is 1.1700, with a range of 1.1200 to 1.2000 reflecting expectations of USD strength. Specifically, ing offers a target of 1.1700 for December 2026, while RBC has a slightly more bullish target of 1.2000 for the same period.
Our position is more aligned with the upper bound of this consensus range, suggesting that the potential for strengthened USD could push this pair higher than the current market anticipations.
How other firms see it
Aligned firms such as ING and RBC see similar hawkish signals, while firms like Nomura and Scotiabank offer more cautious views regarding the potential strength of the USD. This divergence highlights a broad spectrum of market sentiment around interest rates across various institutions.
The trajectory of EUR/USD correlates closely with perceptions of the Fed's monetary policy ahead of any directional moves, emphasizing the importance of upcoming economic data releases related to central bank policies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market expectations for a Fed rate hike have shifted significantly in favor of a 25bp increase by September.
- 02Persistently high real yields reflect structural influences more than inflation concerns, supporting USD strength.
- 03Current consensus on EUR/USD targets suggests room for further USD appreciation as market dynamics shift.
- 04Look for positioning shifts in the wake of major oil price movements impacting the risk sentiment.
Market implications
Traders should closely monitor the 10-year treasury yield, which, if it continues to climb, could further bolster USD purchasing power against EUR and GBP. A focus on the impact of oil prices may also provide insight into short-term FX movements.
Risks to this view
A sudden downturn in oil prices or dovish signaling from the Fed could undermine the current bullish outlook for the USD, potentially realigning expectations more favorably for EUR and GBP. Additionally, unexpected economic data may alter rate hike trajectories.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Standard Chartered | Neutral | 1.1600 |
Morgan Stanley | Bullish | 1.2150 |
UOB | Bullish | 1.1800 |
Articles Rates Spark: Curve influencers Published 17:47 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Warsh and Bessent – the bond influencers. But bigger market pressures should dominate. Tactically, the oil price drives much of the short-term moves in rates.
Structurally, it's the global rise in real rates – that is the real influencer Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker Fed Chair Warsh and Treasury Secretary Bessent have their attention focused on the front end and back end of the yield curve Here's why Kevin Warsh and Scott Bessent can both see silver linings from latest developments Key moves are being seen on both ends of the curve through Monday, as the market continued to digest Chair Warsh's words from Friday. On the front end, the probability of a 25bp hike from the September FOMC meeting has flipped from 50:50 to 3:1 in favour. That's meaningful.
Not quite fully discounted. But absolutely heading in that direction. On the back end, the 10yr break-even inflation rate continued to ease lower.
Only by a few basis points. But it's the kind of move that should please Chair Warsh, as it suggests that his hawkish words have acted to contain inflation expectations, even if they weren't high to begin with (still in the 2.3% area). However, the 10yr yield continued to edge higher, just as it did on Friday afternoon.
The culprit is ongoing upward pressure on real yields, a theme we've opined on now for many months. Higher real yields suggest that the pressure being felt in long rates is not from inflation. It's from a combination of issuance pressure (current and anticipated), and it likely incorporates a positive productivity growth slant coming from the AI revolution.
Chair Warsh specifically referenced a positive secular growth dynamic up for discussion at the opening of the G20 summit in South Carolina. That gels with higher real rates. The optics of seeing Treasury Secretary Bessent deplaneing with Fed Chair Warsh from Air Force Two were interesting.
Not indicative of anything specific, apart from a reminder that both of these men have their attention squarely on the front end and back end of the yield curve. Chair Warsh effectively warned us on Friday that front-end rates may need to be adjusted higher. A week or so earlier, Treasury Secretary Bessent moved to contain long-end yields through an intention to more than double the volume of long-end buybacks.
He went on to assert on Monday that he was not targeting any particular level; rather, he was just prodding the market towards a fairer valuation, from his perspective. Ahead, the front end is liable to remain sticky now at elevated yields unless negated by a weak payrolls report on Friday. But back-end yields remain under rising pressure.
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