Rates Spark: Different parts of the curve, different dynamics
The desk interprets the recent dynamics in the eurozone and U.S. long-end rates as driven by a mix of geopolitical factors and inflation expectations that has substantial implications for the EUR/USD pair. Per the full note , heightened U.S. yields are steering 10-year EUR swap rates up to approximately 3.4%, their highest level since autumn 2023, reflecting a strengthening market consensus around potential rate hikes from the Fed. This leads to increasing pressure on the ECB to follow suit, with a projected 2-3 hikes priced in for the eurozone short end but less certainty at the longer end. Traders should remain sensitive to upcoming economic data, particularly U.S. jobs and CPI reports, which could drastically influence the sentiment around front-end yields.
What the desk is arguing
The desk argues that the interdependence of U.S. long-end rates and eurozone swap rates is reshaping the landscape for forex trading, particularly for EUR/USD. With 10-year EUR swap rates at 3.4%, influenced by U.S. bond performance and oil price dynamics, the market's leaning towards further Fed tightening could pressure the ECB into a similar response, as the burden of proof shifts to dovish policymakers.
Recent reports, including softer ISM and JOLTS data, seem to have barely dented the bullish sentiment on the long end of U.S. Treasuries but have continued to support higher rates in the eurozone. The critical takeaway is that sensitivity to incoming data has heightened, increasing the potential for volatility in response to upcoming reports.
Where it sits in our coverage
The current consensus for EUR/USD is 1.1700 with a range from 1.1200 to 1.2000. Notably, ING and RBC have set their Dec-26 targets at 1.1700 and 1.2000, respectively. Other firms like UBS align with 1.2000, indicating an overarching bullish sentiment.
This perspective dovetails with the broader consensus, positioning slightly above the median target of 1.1700, suggesting that our projection remains cautious yet optimistic compared to some peers positioned at lower ranges.
How other firms see it
Several firms such as ING and UBS present bullish stances on EUR/USD with targets around or above 1.1700. Conversely, firms like DanskeBank offer a more conservative view, with targets below this consensus, suggesting a divergence in rate hike expectations across institutions.
An important related consideration is how the GBP/USD trajectory reflects similar BoE tightening expectations, which could serve as a comparative narrative for the eurozone within the context of central bank policy strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0110-year EUR swap rates are now at 3.4%, influenced by U.S. long-end yields and oil prices.
- 02Market anticipates 2-3 ECB rate hikes in response to Fed tightening pressures.
- 03Sensitivity to economic data is increasing, with key upcoming reports from the U.S. that could shift market sentiment quickly.
- 04Consensus for EUR/USD sits at 1.1700, with major firms aligned towards a bullish outlook.
Market implications
Traders should monitor the EUR/USD level as it approaches 1.1700, especially in light of any surprises in the U.S. jobs and CPI reports that may alter the current bullish sentiment weighted towards long-end rates. The relationships among U.S. fiscal dynamics and eurozone policies will be crucial in interplaying these valuations.
Risks to this view
Potential downside risks include a disappointing U.S. jobs or inflation report that could force the Fed to take a dovish turn, thereby impacting the broader expectations for rate hikes from both the Fed and the ECB. A significant easing in geopolitical tensions could also unlock different dynamics, weakening upward pressure on long-end yields across both markets.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
Standard Chartered | Neutral | 1.1600 |
Morgan Stanley | Bullish | 1.2150 |
Articles Rates Spark: Different parts of the curve, different dynamics Published 17:59 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In the eurozone, long-end rates have felt the spillover from the US, which has helped push 10y EUR swap rates to close to 3.4%, their highest since autumn 2023 Benjamin Schroeder With oil prices drifting higher, long-end yields continue to remain elevated The hawks now have the upper hand for September's Fed meeting After the hawkish tone out of Jackson Hole, the market is still increasingly leaning towards a rate hike in September as the burden of proof has switched to the doves. While the focus is now on the upcoming jobs report and then CPI release, the bar for the data to move the needle has been raised. Still, as bond yields have reached lofty heights, we are starting to see more sensitivity to the data.
But less as to what it means for the near-term tightening, but with its longer-run implications. The softer ISM and JOLTS reports of Tuesday have left front-end yields still higher on the day, whereas 30y US Treasury bonds managed to edge back from the peak, thus flattening the curve. We think it is only part of the story though, as long-end bonds are also driven by a mix of deficit and supply concerns and tech-related growth expectations.
They are also more persistent and maintain an underlying upward pressure on long-end yields. As far as equity valuations are concerned, geopolitical headlines and the feedback from the higher rates seems to have finally found its way back into softer stock markets. But nothing really to change the narrative just yet.
The euro short end is set on 2-3 ECB hikes, but the long-end is less anchored In the eurozone, long-end rates have felt the spillover from the US, which has helped push 10y EUR swap rates to close to 3.4%, their highest since autumn 2023. But there also remains a closer link to geopolitics and price dynamics, with the latest headlines pushing oil prices above US$90/bbl again and gas prices close to the March price peaks of the Iran war. While there was an encouraging drop in the core inflation rate on Tuesday, signalling that second-round effects remain contained, this does not take away the pressure looking ahead.
There indeed are more calls out of the European Central Bank that a September hike might not be sufficient. To be fair, the market is already discounting 50bp of tightening by February next year. Such comments merely confirm the hawkish pricing rather than pushing it further comment.
That leaves front-end pricing of the EUR curve more anchored, but gives the long end the leeway to move more with the US for now, seeing some reprieve and getting pulled back from the peaks. That reprieve could still prove to be temporary. Wednesday’s events and market view There are no data releases of note out of the eurozone.
Sources & References
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