Rates Spark: Recalibrating rate assumptions
The desk anticipates increased rates volatility driven by recent central bank meetings and macroeconomic updates, particularly within the USD and GBP regions, as well as a reinforcing hawkish tone from the ECB based on solid eurozone growth. Per the full note source, the expectation is for a dovish repricing in USD and GBP rates following Fed Chair Kevin Warsh's cautious stance on inflation, while the euro swap rates are projected to settle higher due to resilient growth in Europe. Currently, the market's focus will remain on any directional guidance from upcoming Fed communications and their implications for USD rates.
What the desk is arguing
The desk frames this as a period of recalibration for rate assumptions in light of conflicting signals from central banks. This week's developments indicate a dovish shift for USD and GBP rates, especially after a hold from the Federal Reserve and subdued inflation data from the PCE index.
Moreover, the desk emphasizes that the dovish sentiment is underscored by market reactions following the Fed's last meeting, where any hint of dilution in the commitment to inflation control could prompt swift market responses. Thus, while USD and GBP face downward pressures, euro swap rates may find stability as they correlate with stronger European economic data.
Where it sits in our coverage
The consensus target for GBP/USD is 1.075 with a range of 1.04 to 1.12, with standout projections from firms like: - jpmorgan: 1.10 (target for Mar-26) - bofa: 1.04 (target for Mar-26)
This view aligns with jpmorgan, which suggests a more bullish outlook in contrast to bofa’s more conservative estimate. The desk's expectations align well within the current range, cautioning that upcoming macroeconomic indicators will shape potential directional shifts.
How other firms see it
The collective outlook appears to lean towards a cautious but bullish stance from firms such as jpmorgan and deutschebank. Conversely, firms like bofa maintain a more bearish view in the short term, supporting a mixed sentiment across the board.
Given the backdrop of central bank activities, currency pairs like EUR/USD and GBP/USD will likely reflect these dynamics closely, with markets keenly watching for adjustments based on the ECB and Fed’s policy cues.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expect an uptick in rates volatility influenced by recent macroeconomic data and central bank meetings.
- 02EUR swap rates should find support around 3.2% due to positive European growth metrics.
- 03A dovish repricing of USD and GBP rates signals potential downward pressure in these markets.
- 04Focus on Fed communications for potential market-reaction triggers regarding rates.
Market implications
With the Fed’s next meeting on the horizon, traders should monitor how any dovish hints or a lack of commitment to inflation control could influence USD rates. A decisive shift in expectations could see GBP/USD testing its boundaries within the 1.04 to 1.12 range, particularly as economic indicators are released.
Risks to this view
A more aggressive inflation reading or a shift in tone from Fed Chair Warsh could force a reversal in current rates positioning, potentially resulting in renewed upward pressure on both USD and GBP rates.
Articles Rates Spark: Recalibrating rate assumptions Published 06:14 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets have a lot of new information to absorb from this week, and we can expect more rates volatility going forward. We see scope for a more dovish repricing for USD and GBP rates, but longer rates could see upward pressure. Robust eurozone macro data allows euro swap rates to settle higher Michiel Tukker With central bank decisions, macro data and geopolitical tensions, we see volatility ahead for rates markets Central banks, macro data and geopolitics: a volatile cocktail Markets have a lot to absorb, and we should brace for more rates volatility.
Eurozone growth seems to be holding up, with the headline GDP figure for the second quarter on par with the US number at face value. Don’t expect a stellar uptick in Europe’s growth from here, but at least the downside risks from the geopolitical turmoil haven't seemed to materialise. In effect, the European Central Bank can focus more on inflation than on growth, supporting the hawkish stance of markets.
Positive market sentiment and higher US rates also add upward pressure to longer rates, which means the 10Y euro swap rate can probably find comfort around the 3.2% handle. In contrast, we see a stronger case for a dovish repricing in USD and GBP rates at the moment. After a hold by the Federal Reserve and a benign PCE deflator, markets no longer see the Fed hiking twice over the coming year.
Having said that, September will be a difficult meeting to remain on hold. Learning from the reaction to Wednesday’s meeting, we don't think markets will take it lightly if Fed Chair Kevin Warsh doesn’t show full dedication to fighting inflation. And with little to no forward guidance, markets are left in the dark for many weeks.
That leaves longer US rates exposed to another push higher. The Bank of England managed to comfort markets about the inflation trajectory, in line with our own economists’ views. This should give the BoE more time to hold the policy rate, with markets now only pricing in a 30% probability of a September hike.
For longer rates, the story remains more complicated, however. The 10Y GBP swap rate tends to follow US rates, for which we still see more upside risks in the near term. As such, similar to the US, we think steeper curves are the natural next move from here.
Friday's events and market view The Bank of Japan is the last major central bank to meet this week. Markets see a hold, and so do we. From the eurozone, the CPI number for July will be the highlight.
Sources & References
How we cover this story