Rates Spark: Geopolitics in focus ahead of US CPI
The desk interprets current market dynamics as heavily influenced by the geopolitical landscape and positioning ahead of the pivotal US CPI data due this Wednesday, which could steer future rate expectations. Per the full note from ing-think, lingering unease over inflation metrics combined with last week's disappointing payroll figures has kept rates within a constrained range, notably around the 3.1% to 3.2% level for Bunds. Softer inflation could effectively reduce real yields further, permitting a baseline for rate shifts that dovetails with longer-term economic expectations. Moreover, the upcoming CPI will be scrutinized, as expectations for Fed policy direction remain fluid and uncertain, with only a 40% probability currently priced in for future hikes.
What the desk is arguing
The desk sees the interplay of geopolitical tensions and US CPI readings as pivotal to shaping market outlooks over the coming weeks. Per the full note, the release of softer inflation metrics could ease fears surrounding Fed policy and further lower yields. Such developments have resulted in Bunds remaining unattractive for protecting against geopolitical volatility given their limited movement in current trading ranges.
Conversely, expectations for the US CPI print highlight a critical point, as any softening could lower the effective neutral rate, suggesting that yields have room for a downward adjustment. Market responses will hinge on the CPI outcome, which can shift views on the Fed's trajectory leading up to the September meeting.
Where it sits in our coverage
For EUR/USD, our consensus target stands at 1.1700, with a range spanning from 1.1200 to 1.2000 by March 2026. The following firms reflect broader market sentiment: - commerzbank: 1.1900 (Mar26) - ubs: 1.2000 (Mar26) - morganstanley: 1.2000 (Mar26)
While this projection aligns relatively closely with market targets, it ultimately remains towards the upper end of the consensus spectrum, reflecting potential bullish sentiment as geopolitical concerns loom large against a backdrop of inflation uncertainty.
How other firms see it
Several firms such as deutschebank and morganstanley forecast bullish movements in GBP/USD, anticipating supportive UK economic responses and BOE rate adjustments. In contrast, firms like goldman hold more conservative estimates, showcasing divergent views across the board.
The movements of EUR/USD, due to its correlation with Federal Reserve policy shifts, will be indicative as the CPI data approaches, while the GBP/USD trajectory remains sensitive to the Bank of England's next steps amid fluctuating inflation landscapes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Upcoming US CPI print is a potential catalyst for shifts in rate expectations.
- 02Geopolitical tensions continue to confine market movements, particularly for Bunds.
- 03Current positioning indicates a preference for lower yields alongside inflation concerns.
- 04Consensus targets suggest bullish sentiment for EUR/USD amid broader market volatility.
Market implications
Traders should monitor the forthcoming CPI release closely, particularly if it suggests softer inflation trends that may prompt market re-evaluation of policy paths. Real yields could shift further downward, impacting how Bunds and UST yields react based on the data's implications for central bank strategies.
Risks to this view
Should the CPI result exceed market expectations, it could invalidate the current bullish stance, leading to unexpected upward movement in yields and risk-off sentiment across currency pairs. A sudden escalation in geopolitical tensions, particularly in oil-trading regions, may also pose significant risks to predictions around yield movements.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
ABN AMRO | Bullish | 1.1500 |
Bank of America | Bullish | 1.1500 |
Articles Rates Spark: Geopolitics in focus ahead of US CPI Published 07:27 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Rates remain range-bound as markets watch geopolitics and await Wednesday’s key US CPI print. Softer inflation could pull yields lower, while Bunds offer a limited geopolitical hedge; Gilts look too high but are hard to trade amid oil volatility Michiel Tukker and Benjamin Schroeder All eyes are on this Wednesday's US CPI release following last week's poor payroll numbers Everything hinges on two more US CPI readings US rates ended last week with a dovish aftertaste on the back of poor payroll numbers, but the CPI figure this week should be more instrumental. Until September’s Federal Reserve meeting, we only have two more CPI readings.
And markets still need to make up their minds about the next Fed move, with now around 40% of a hike priced in. Arguably, the eventual price action after the negative payrolls numbers was quite limited given the disappointing figures, suggesting the focus is on inflation. A benign CPI could help ease fears about Fed Chair Kevin Warsh turning the central bank overly dovish, which should also bring longer rates lower too.
Having said that, long-term inflation expectations as measured from 5Y5Y forward inflation swaps look very benign. In fact, the trading range is well below the average in 2025 – and while oil prices have risen significantly since. Real rates are therefore the main culprit behind higher UST yields.
Having said that, softer inflation numbers can also spill over to lower real rates. Falling inflation would imply that the neutral rate might be lower than the 4% currently priced in by markets. Bunds are not the place to hide against geopolitical risks The 10Y Bund yield seems comfortable in the 3.1% to 3.2% trading range, and unless oil makes a big move from here, we doubt we will see much movement.
Despite plenty of geopolitical uncertainty ahead, Bunds don’t show any signs of safe haven demand. Only at the very start of the Iran conflict in March did we observe a more noticeable outperformance of Bunds versus swaps, but those dynamics haven't been seen recently. Part of this might also be explained by strong market sentiment in risk assets.
And with stock-bond correlations in positive territory, holding longer-dated rates does not provide a trustworthy hedge against adversaries. If anything, an improving growth outlook actually poses more upside risk to euro rates. Gilt yields too high, but impossible to trade amid oil volatility The 10Y Gilt yield also seems to stay range-bound, oscillating around 4.8% and 5.0% for most of the past few months, but we take a more bullish view on sterling rates.
Sources & References
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