Rates Spark: Oil drives rates more than ECB speak
Per the full note source, ING argues that oil is the dominant driver of euro rates, with Brent above $100 keeping front-end swaps elevated. The ECB's July hold was a non-event, and markets still price a September hike. The long end, via 5Y5Y forwards, has been flat, suggesting resistance for 10Y rates to follow oil higher. Key data to watch are eurozone and US PMIs due Friday.
What the desk is arguing
ING frames oil as the primary driver of euro rates, arguing that the ECB's July meeting had negligible market impact. The desk states: "Intraday prices did little to suggest that there was a monetary policy meeting at all on Thursday." Markets continue to price second-round inflation risks as oil remains elevated, with uncertainty lingering until better data on underlying price pressures emerge.
The supporting evidence is a clear correlation: for every $10 increase in Brent, the 2-year euro swap rises by approximately 15bp. Longer rates, however, are not following through as quickly; 5Y5Y forwards have shown very little movement, implying that 10Y rates may find resistance to move higher from here.
Where it sits in our coverage
We have no tracked consensus or per-firm forecasts for this commentary, as no specific currency pair was identified.
How other firms see it
We have no trackable firms for this commentary.
What the calendar says
No high-impact events are scheduled in the next 30 days for the relevant jurisdictions.
Key takeaways
- 01Oil is the prime driver of euro rates, with Brent above $100 dominating front-end pricing.
- 02ECB July meeting was a non-event; a September hike remains nearly fully priced in.
- 03Long-end rates (10Y) show resistance to follow oil higher, as 5Y5Y forwards are flat.
- 04Friday's eurozone and US PMIs are the next focus; consensus sees modest recovery.
Market implications
Watch 2-year euro swap spreads for oil sensitivity; a sustained Brent move above $105 could push 2Y swaps another 7-8bp. Friday's eurozone PMI, if below consensus, may temper rate expectations, while a strong print could reinforce the hawkish oil-driven narrative.
Risks to this view
A sharp decline in oil prices (e.g., on OPEC+ supply surprise or demand shock) would reverse front-end rate pressure and invalidate the thesis. Also, if ECB guidance turns dovish, markets may decouple from oil.
Articles Rates Spark: Oil drives rates more than ECB speak Published 07:27 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download No move from the ECB as expected, but a September hike remains almost fully priced in. Oil is still the prime driver of euro rates, although the impact is now more muted at the long end of the curve. Markets continue to price in more second-round inflation effects as oil prices remain elevated Michiel Tukker Oil prices remain the main driver of euro rates, especially the front end Front end fully driven by oil, long end less so Yesterday's ECB meeting made clear that oil is in the driving seat.
Intraday prices did little to suggest that there was a monetary policy meeting at all on Thursday. The challenge for both the ECB and markets is predicting second-round inflation risks. Markets are still seeing the risk of second-round effects growing as oil prices remain elevated, and until we have better data on underlying price pressures, uncertainty will linger.
For that reason, markets are likely to stick to their script and closely follow oil prices. Meanwhile, oil is testing above $100 per barrel again, pushing up the front end, but longer rates are not following through as quickly. If we isolate the long term by looking at 5Y5Y forwards in euro swaps, we see very little movement over the last few trading days.
In effect, that means that 10Y rates may find more resistance to move higher from here. This is in contrast to 2Y rates, which remain highly sensitive to any moves. For every $10 increase in Brent, we see the 2Y euro swap rise by some 15bp.
Friday's events and market view The highlight in terms of data will be eurozone PMI figures. Consensus sees the eurozone composite index increasing from 50.0 to 50.2, which would suggest a gradual recovery. A small uptick is also pencilled in for the US PMI numbers.
Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London.
Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article Front end fully driven by oil, long end less so Friday's events and market view
Sources & References
How we cover this story