Rates Spark: Lower despite the ECB’s hawkish holdouts
The desk anticipates continued downward pressure on Eurozone rates, reflecting broader market dynamics and a subdued economic outlook. Per the full note from **ing-think**, despite hawkish sentiments voiced by ECB officials, such as Isabel Schnabel's comments on the need for further rate hikes, actual market movements suggest a shift in sentiment as macro data reflects potential weakness. Furthermore, the recent U.S. consumer spending data, which registered only 0.5% annualized growth, underscores the fragility of demand, lending additional credence to the view that rate hikes may be less imminent than previously thought.
What the desk is arguing
The desk argues that the Eurozone rates market remains benign, undermined by concerns around economic performance and energy prices. Per the full note from ing-think, hawkish rhetoric from the ECB is losing its potency among traders, as U.S. Treasury yields decline due to suppressed consumer spending numbers and signs of macroeconomic weakness.
The messaging from the ECB, particularly from Schnabel signaling the necessity for rate hikes, contrasts sharply with market realities where the U.S. 10-year Treasury yield has been moving lower, reflecting a palpable risk-off sentiment. The likelihood of maintaining rates or even cuts by the Federal Reserve seems strengthened by the recent 0.5% annualized consumer spending growth, which invites a reassessment of growth expectations.
Where it sits in our coverage
The current consensus on EUR/USD stands at 1.1700 (range: 1.1200–1.2000), with firms like deutschebank targeting 1.2500 and goldman aiming for 1.2000 by December 2026.
This desk positioning does align with several firms’ projections, although it skews towards the lower bound of the forecast range, suggesting that while sentiment is shifting, the overall bullishness on the euro’s value may still carry some weight in the market.
How other firms see it
Several firms, including citi and hsbc, are closely aligned with the desk's perspective, forecasting similar targets around the 1.1700 mark for March 2026, while mufg offers a bolder outlook of 1.2600 for the same period.
In contrast, scotiabank holds a more pessimistic view for the euro, reflecting divergence in expectations that could be influenced by the ECB’s forthcoming decisions or broader economic indicators.
What the calendar says
The current calendar shows no high-impact events scheduled, suggesting that the market will continue to react primarily to evolving macroeconomic data and central bank commentary in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expect downward pressure on Eurozone rates driven by economic weakness.
- 02Market yields reflect skepticism towards ECB’s hawkish rhetoric.
- 03Recent consumer spending data indicates vulnerabilities in the US economy.
- 04Consensus targets for EUR/USD suggest a cautious outlook.
Market implications
Traders should monitor the EUR/USD, currently poised at 1.1500, as crucial sentiment indicators evolve. Additionally, watch for any upcoming comments from ECB officials that may change the current outlook or reinforce hawkish stances. A breakdown below 1.1400 could lead to increased bearish positioning.
Risks to this view
The primary risk to this outlook would be stronger-than-expected economic data from the Eurozone or the U.S. that might compel the ECB to follow through with actual interest rate hikes. A resurgence in energy prices could also shift the inflation narrative, prompting shifts in ECB communication and strategy.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Société Générale | Bearish | 1.1400 |
Scotiabank | Bearish | 1.1200 |
Commerzbank | Bullish | 1.2200 |
Articles Rates Spark: Lower despite the ECB’s hawkish holdouts 07:38 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Rates markets remain in bullish mode, given a benign energy price backdrop, tech stock narratives to worry about, and even data with a whiff of macro weakness Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker The ECB's Isabel Schnabel has stated that “as things stand, [the ECB] will have to raise interest rates further." Such calls are starting to ring hollow with market participants, however Treasury yields headed lower on a whiff of macro weakness The US 10yr Treasury yield gapped lower on the back of Thursday’s data releases, which provided a whiff of macro weakness. The big outlier was the much weaker-than-expected 0.5% annualised consumer spending growth for the first quarter – a decline from 1.4%. GDP growth itself was actually revised up to 2.1% annualised, but mostly reflecting a downward revision of imports (which in fact gels with lower domestic demand).
The closely watched PCE inflation data came broadly as expected, even offering a silver lining with a better-than-expected 0.4% month-on-month headline reading for May. The year-over-year rate still came in at 4.1%, driven by an increase in energy-related prices. Firmness in housing costs and financial and insurance services nudged core PCE inflation to 3.4%.
This latter number is the one that makes it tough for the Federal Reserve to cut, and in fact maintains the pressure to hike. We expect no change from the Fed for the rest of 2026. Treasuries reacted to the consumer spending aspect within the first-quarter GDP data, dragging the real rate lower.
Still, it likely is not enough to spark a follow-through rally given the offsetting firmness in the data beyond the first quarter; May personal income and spending were both up, and jobless claims data remained firm. EUR rates brush away the ECB's hawkish holdouts EUR rates have followed the US lead lower as front-end pricing of ECB hikes has also been pared back. Another hike by the European Central Bank by year-end is now just about fully discounted.
Oil prices have shown only a muted reaction to news of ships in the Strait of Hormuz being fired at and to other setbacks in the Middle East. Levels below US$76/bbl still look relatively benign, and calls from the ECB’s hawks for further action are starting to ring hollow with market participants. Isabel Schnabel, who is slated to speak again on Friday, had argued just this Wednesday that “as things stand, [the ECB] will have to raise interest rates further." Of course, there is still uncertainty around the ceasefire and eventual deal in the Middle East, and that is likely part of the reason officials remain reluctant to change their approach too quickly.
Sources & References
How we cover this story
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