Rates Spark: Kevin Warsh and John Healey walk into a bar
The desk believes that the Federal Reserve will maintain the status quo on interest rates, largely influenced by the current macroeconomic environment and a lack of surprises in upcoming fiscal policy. Per the full note , there is a consensus that major market movements in the US 10-year yields are contingent on the Fed's decision, particularly as it hovers near 5%. Additionally, UK gilts are expected to see a slight decline after the Autumn Budget, driven by a waning risk premium. This positioning matters as the FX market trends are significantly interlinked with these yield movements, especially for pairs like EUR/USD and GBP/USD.
What the desk is arguing
The desk argues that barring unexpected fiscal impulses, the Fed is likely to keep rates unchanged at their next meeting. This outlook aligns with the expectation that the US 10-year yield will remain stable, thus further stabilizing the FX landscape around major pairs.
Evidence suggests that the UK 10-year gilt yields price in a political risk premium of approximately 20bps which is already well-defined ahead of the Autumn Budget. According to the analysis, gilts are less likely to be shocked by significant spending measures, potentially providing room for a relief rally in response to a predictable budget announcement.
Where it sits in our coverage
For EUR/USD, our current consensus target stands at 1.1500, with forecasts from firms like HSBC at 1.1000 and Rabobank also pegging it at 1.1700 for Dec-26. The desk’s assertive view aligns with the upper range of predictions around this pair.
How other firms see it
Firms aligned on the dovish projection include Nomura and CIBC, holding expectations of moderate stability in yields which would indirectly bolster the EUR/USD trajectory. In contrast, firms like Investec and Scotiabank provide lower targets, reflecting a more cautious or bearish sentiment on rate stability and yield prospects in the UK context.
Additionally, the USD/JPY pair is also pivotal to monitor, particularly with the expected stance from the Bank of Japan influencing market flows as sentiments shift around currency valuations.
What the calendar says
With no major upcoming events scheduled, traders will likely focus on existing fx fundamentals and central bank communications as they navigate these pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed is expected to maintain current rates, fostering stability in the FX markets.
- 02UK gilt yields are projected to decline post-Autumn Budget, reducing political risk premium.
- 03The EUR/USD target consensus reflects ongoing uncertainties, with varying predictions across firms.
- 04Monitoring the USD/JPY trajectory will be essential as external factors could influence currency valuations.
Market implications
Focus on the EUR/USD trading range around the 1.15 mark, as shifts in US yields could lead to immediate reactions in major crosses. Any signs of spending forecasts deviating for the UK budget could further impact GBP pricing.
Risks to this view
Surprise fiscal measures or unexpected statements from the Fed could destabilize the anticipated equilibrium, leading to significant adjustments in yield expectations and FX positioning.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Standard Chartered | Bullish | 1.1800 |
Scotiabank | Bullish | 1.1700 |
Danske Bank | Neutral | 1.1200 |
Articles Rates Spark: Kevin Warsh and John Healey walk into a bar Today, 13:26 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Barring a Brazilian-style election surprise, the Fed should leave rates unchanged. It seems the US 10yr is waiting to tick this off before it deviates too much from 5%. Meanwhile, the UK 10yr yield should ease lower after the UK Autumn Budget as the tail risk of spending surprises get priced out (we estimate a political risk premium of c.20bp in the 10yr) Michiel Tukker and Padhraic Garvey, CFA UK Chancellor John Healey.
Gilt yields could ease a bit lower after the UK Autumn Budget as the tail risk of spending surprises gets priced out Gilts should find some relief in a boring budget, but risks remain Gilt markets are always a bit nervous heading into the Autumn Budget announcement, and this year is no different. We estimate the risk premium embedded in the 10Y gilt yield to be around 20bp, whereas this was close to zero a few months ago. Overall though, global factors continue to be the bigger driver of sterling rates and with energy hitting new highs, we don't expect this to change.
Gilt auction results held up relatively well leading up to this budget, whereas last year’s auctions reflected more nervousness. The bid-to-cover ratios and yield tails in the three auctions preceding the 2025 budget announcement showed some weakness. However, this is not evident in the most recent 10yr gilt auction last week.
And also Tuesday's 6yr gilt auction showed healthy demand. But we do think a bit of a relief rally could take place as the budget turns out to be more boring than Burnham’s ambitions would imply. Also, last year the auctions just after the budget looked slightly better and gilts rallied on the shortening of issuance maturities.
An unwinding of the risk premium would offer up to 20bp of relief for 10yr gilts. Of course, a surprise spending splurge could turn the story quite bearish as this would compound with energy-related inflation fears. Broader political risks, however, are likely to stay, and early elections could be the next surprise for markets to deal with.
We’ve learnt from France that markets attach more value to political stability than to the decimal place of the fiscal deficit. If Burnham decides to reopen the political battleground, we can expect investors to take a more cautious approach again to gilts. Until inflation is under control, any government spending promises would quickly translate to more upward pressure on gilt yields.
Gilt auctions holding up better than ahead of last year's Budget Auctions filtered for Normal Type and 8-12y Tenor Source: ING, DMO, Macrobond "> Auctions filtered for Normal Type and 8-12y Tenor Source: ING, DMO, Macrobond It seems the US 10yr is waiting to tick this FOMC meeting off before it deviates too much from 5% A solid performance for US Treasuries in the past couple of weeks has acted to reduce the prior tightening impulse that had gripped the market. The 10yr yield below 5% obviously contrasts dramatically with the prior break above 5.25%. We’re not convinced that the more recent downward lurch will persist.
Sources & References
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