Rates Spark: Leaning hawkish, but no action
The desk interprets the Fed's recent statements as signaling a hawkish tilt without immediate action, suggesting a continued focus on achieving price stability anchored around the 2% inflation target. Per the full note from ING, the U.S. 10-year Treasury yield has notably surpassed the 5% mark, reinforcing market expectations surrounding the Federal Reserve's stance on interest rates. The upcoming economic data releases may further influence this trajectory, especially as elevated inflation remains a concern. Meanwhile, our consensus targeting for EUR/USD reflects a potential upward trajectory, despite varied expectations across firms.
What the desk is arguing
The desk suggests that the recent stance of the Fed indicates a hawkish outlook, tempered by the reality of no immediate rate hikes. Per the full note from ING, inflation expectations remain sticky, and the UST 10-year yield is already returning to the 5.25% level, reflecting market recalibrations after the latest FOMC meeting.
Moreover, the emphasis on a strict 2% inflation target suggests that market participants should brace for future tightening if inflation metrics continue to fall short. This greater attention on inflation signals that the Fed is poised to take action should conditions necessitate it.
Where it sits in our coverage
For EUR/USD, our current consensus target stands at 1.1253, with a range reflecting varied expectations: firms like Commerzbank target 1.1900 for March 2026, while ING sits at 1.1700.
While our outlook aligns with the sentiment of several firms, it represents the lower end of recent forecasts. The mixed positioning across firms suggests that a material deviation in either monetary policy or inflation data could prompt significant valuation shifts.
How other firms see it
A cluster of firms, including BNPParibas and Rabobank, are aligned in their hawkish expectations regarding the Fed's policy path, predicting further dollar strength. In contrast, HSBC offers a more cautious view, recognizing risks tied to global economic conditions.
Given this backdrop, the trajectory of EUR/USD will be closely tied to the Fed’s inflation targets, especially as upcoming U.S. CPI and PCE data are likely to bring further clarity on the Fed's next moves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed's current position reflects a hawkish stance without immediate rate hikes.
- 02The U.S. 10-year Treasury yield has recently exceeded 5%, indicating market repositioning.
- 03Expect further volatility in FX markets as inflation data releases approach.
- 04The consensus target for EUR/USD suggests a cautiously optimistic outlook.
Market implications
Watch for the 10-year Treasury yield reaction as it attempts to stabilize around the 5% level. Upcoming inflation data could be pivotal in shaping market sentiment, particularly for EUR/USD. Positioning ahead of potential shifts should be monitored closely.
Risks to this view
A substantial decrease in inflation metrics or a dovish pivot from the Fed could quickly reverse bullish sentiments about the U.S. dollar. Additionally, geopolitical developments or a significant economic contraction may further complicate the Fed's tightening path, impacting the broader FX landscape.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles Rates Spark: Leaning hawkish, but no action Published 17:33 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download On the Fed, it's tough to view the current set-up of still elevated printed inflation and a Fed on hold as all that protective. We glean from this enough to validate the move back above 5% on the 10yr. On the ECB, forward guidance on policy rates is likely of secondary interest compared to questions about France or minimum reserve requirements Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker Fed Chair Warsh had comforting words on inflation expectations, but we still the UST 10-year yield heading back toward 5.25% The lean hawkish is enough to validate the break back above 5% for the 10yr Hardly a word in the short Fed statement that did not lean hawkish.
But no hike. Prior to the FOMC meeting, it was remarkable how the 10yr yield had been clinging to the 4.99% level. It was like a comfort level; technically below 5%, but not too far below in case it needs to turn tail and shoot back up.
It seemed that the US 10yr was waiting to tick off this outcome before deviating too much from 5%. Well, it’s now had the outcome. The initial reaction was up.
But the reaction to Chair Warsh’s words at the press conference was to move back down to 5%, and briefly below. This can be rationalised by Warsh’s comforting words on inflation expectations, which he deemed to have been tamed somewhat. That all being said, our interpretation is that this Fed still has a job to do if the type of price stability that Chair Warsh has described is to be achieved.
He has described price stability as strictly 2%, and he seems to be serious about hitting that. This is good from a protective sense for the back end. At the same time, it’s tough to view the current set-up of still elevated printed inflation and a Fed on hold as all that protective.
Also, inflation expectations in fact rose post the Fed decision and subsequent Warsh commentary. We glean enough from this to validate the move back above 5% on the 10yr. We maintain our view that we’re on a journey back up in the direction of 5.25%.
The front end of the curve took the tone from Chair Warsh better, with the 2yr yield edging lower. What the front end likes is the no change from the Fed, and the idea that the Fed is giving the economy time to fully react to the first 25bp rate hike. There is a world here where this Fed might not be as aggressive as it is pretending to be through its words, as the actions so far are just one 25bp hike.
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