Rates Spark: Growth disappointments would still build a bullish case
The desk posits that despite recent growth disappointments, the overall bullish sentiment for euro rates will persist, primarily driven by upward pressure from oil prices and geopolitical tensions. Per the full note by ing-think, the 2-year Bund yield has surged towards 3% as energy prices inflate, reflecting a sensitive dynamic within euro rates compared to their US counterparts. With the current consensus target for the EUR/USD near 1.17, any offsetting weakness in growth could quickly shift ECB policy expectations, creating volatility opportunities in the FX market.
What the desk is arguing
The desk underscores that disappointing economic performance can lead to a substantial bullish shift in euro rates, emphasizing a potential disconnect between growth expectations and ECB actions. Per the commentary from ing-think, oil prices nearing $100 are not only impacting inflationary pressures but also shaping rate trajectories more acutely in Europe compared to the US.
Evidence from the research indicates that while the 2-year Bund yield has risen 90 basis points since the year's start, 10-year yields have increased less dramatically, indicating a nuanced response in market sentiment. Particularly, only 30 basis points of the yield increase is attributed to actual inflation expectations, underscoring the vulnerability of the eurozone to external shocks when growth falters.
Where it sits in our coverage
Our consensus target for EUR/USD currently stands at 1.1700, with a range from 1.1200 to 1.2000. Notable firm targets for December 2026 include: - RBC: 1.2000 - Morgan Stanley: 1.2150 - Investec: 1.1700
The desk's positioning aligns closely with the upper end of this range, particularly reflected in outlooks from firms like Morgan Stanley and RBC, suggesting a growing consensus on the potential for EUR appreciation against the USD.
How other firms see it
Firms aligned with the desk’s view include Nomura and CIBC, both expecting EUR/USD to remain strong, while Danske Bank and Lloyds exhibit more cautious stances regarding potential declines in the euro.
The sentiment surrounding EUR/USD trajectories is mirrored in discussions around the ECB’s rate path and the global energy market. Traders should look for potential spillovers from shifts in energy prices affecting broader eurozone economic outlooks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Economic growth disappointments can trigger a bullish shift in euro rates.
- 02The direct influence of rising oil prices on euro rates is significant.
- 03Current consensus for EUR/USD aligns closely with the desk's bullish outlook.
- 04Market sensitivity to ECB responses amid growth fluctuations remains high.
Market implications
Traders should monitor the 2-year Bund yield as a key indicator, with a focus on moves above 3%. The next significant test will be market reactions to ECB communications and positioning ahead of potential shifts in growth forecasts, especially with geopolitical tensions affecting oil prices.
Risks to this view
A substantial deterioration in eurozone growth could prompt a more aggressive easing stance from the ECB, leading to a bearish environment for euro rates. Additionally, any stabilization in oil prices could alleviate inflationary pressures, undermining current bullish case scenarios.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
Articles Rates Spark: Growth disappointments would still build a bullish case Published 07:25 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download With oil approaching $100 again, euro rates are following higher. But the upward pressure is not just about energy costs; the growth picture is important too. That also means disappointing economic performance can quickly trigger a material bullish move in rates Benjamin Schroeder and Michiel Tukker Oil prices are pushing rates up again Energy and inflation dynamics still driving euro rates While US markets closed for the Labor Day holiday on Monday, pressure on EUR rates continued to build at the short end as geopolitical headlines pushed up oil prices.
The 2y Bund yield is back to 3%, nearing the peaks of last week. Energy prices remain an area where EUR rates are more sensitive than their US counterparts. But it is worth remembering that the impact is not distributed evenly across the curve.
While 2y Bund yields have risen 90bp versus levels observed at the start of the year, 10y yields have risen around 55bp. More importantly, only 30bp is due to actual inflation expectations rising (measured by inflation swaps). In terms of contributions, that is still more than in the US, underscoring the exposed position of the eurozone.
The flipside is that, even without the rise in inflation expectations, the 10-year Bund yield would still be above 3.1%. The remaining increase in real yields reflects not only more resilient domestic growth expectations, but also a higher global term premium linked to rising actual and expected debt levels. As a result, a significant decline in long-end yields hinges on more than just easing geopolitics.
Disappointing growth can still easily trigger lower rates Imagining a scenario whereby EUR rates reprice significantly lower is not that difficult. If the improving growth outlook were to disappoint, the ECB's reaction function could change quickly. Not only would near-term policy rate expectations see a dovish repricing, but the neutral rate would likely be pulled lower as well.
Arguably a one-off inflation shock from oil should not have a lasting impact on the neutral rate. The EUR curve currently positions for an ECB terminal rate of around 3%, well above the 2% that was targeted for much of 2025. If the eurozone economy does not deliver on the heightened expectations, a repricing of the ECB landing zone could easily shave off 50-100bp from longer rates.
Not our base case, but something to keep in mind. Tuesday's events and market views A light day in terms of data. From the US, we have the NFIB small business survey.
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