Rates Spark: Resumed steepening impulse
Lead — The desk anticipates a continued steepening of the yield curve following Thursday's disappointing US payrolls data. The employment metrics indicate a cooling labor market, which should support lower short-dated yields while allowing long-dated yields to remain elevated. Per the full note source, the employment growth for June missed expectations at 57k, coupled with a downward revision to the previous month, signaling less urgency for rate hikes. This backdrop positions the USD for a potential weakening against major currencies such as EUR and GBP as markets recalibrate their expectations for Federal Reserve policy.
What the desk is arguing
The desk expects that the steepening trend in the yield curve will persist, with lower short-dated yields pushing rates down further while long-dated yields stabilize. Per the full note source, the unemployment rate dropped to 4.2%, suggesting some resilience in the labor market, but the muted job growth tempers the likelihood of further immediate rate hikes. This environment is critical for FX positioning in pairs like EUR/USD and GBP/USD, which are influenced by interest rate differentials.
The data indicates that longer-dated yields are underpinned by a persistent selling of inflation expectations, which could signal more sustained relative strength for currencies like the euro and pound against the dollar. With the 2-year yield showing a tendency to stay lower and the curve net steepening, traders might increasingly favor trades that capitalize on this dynamic.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1700, within a range of 1.1200 to 1.2000. Specific Dec-26 targets from firms include Goldman at 1.2000, Deutschebank at 1.2500, and MUFJ at 1.2000.
This view aligns closely with Scotiabank, projecting a March 2026 target of 1.1734, while Citi stands on the lower end with a target of 1.1300. The desk's positioning implies an upward trajectory that is reinforced by recent labor data anomalies, contrasting with broader market pessimism reflected in some conservative forecasts.
How other firms see it
Firms aligned with the desk’s outlook include Scotiabank, Goldman, and Deutschebank with bullish targets reflecting expectations for currency appreciation against the USD. In contrast, Citi and MUFJ exhibit a more cautious stance, forecasting lower targets that may not fully align with the anticipated market shifts.
Furthermore, the GBP/USD trajectory mirrors the expected approach of the BoE and could create opportunities as these trends develop. Traders should also keep an eye on the USD/JPY dynamic influenced by Fed decisions and BOJ policy signals, particularly given how divergence in rate paths can impact cross-currency flows.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US payroll data shows weak employment growth (57k) and a falling unemployment rate (4.2%).
- 02The yield curve is steepening as long-dated yields are expected to hold while shorter yields fall.
- 03This environment favors long positions in EUR/USD and GBP/USD against the USD.
- 04Cross-market correlations signal potential for significant USD weakness in the medium term.
Market implications
Traders should closely monitor the 10-year yield, which has been hovering around the 4.45% to 4.50% range, while keeping an eye on the consensus targets for EUR/USD and GBP/USD as they reflect the expected market shifts. With no major economic events on the horizon, sentiment may remain fluid, potentially allowing for adjustments in positioning based on market perceptions of US labor data.
Risks to this view
The primary risk to this thesis arises from unexpectedly strong new job creation numbers in forthcoming labor reports, which could reignite expectations for rate hikes. Additionally, any shifts towards tighter monetary policy from the Federal Reserve could reverse the current trend, leading to a rapid repricing of the interest rate differential and impacting FX flows.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
MUFG | — | 1.2000 |
Citi | — | 1.1200 |
UOB | — | 1.1445 |
Articles Rates Spark: Resumed steepening impulse 07:51 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Thursday's payrolls number prompted some steepening. We think there is more to come, as longer dated yields hold up while shorter dated yields ease lower. Longer dated yields are supported by a tendency for real yields to rise, partly as inflation gets sold.
Shorter dated yields should fall as that selling of inflation means less inflation/rate-hike risk Michiel Tukker and Padhraic Garvey, CFA After Thursday's payroll number we see more steepening potential in both US and eurozone rates US employment data leaves the curve net steeper, from the front end The US payrolls report saw employment growth for June (57k), clearly a miss versus expectations, and there was a downward revision to the previous month – hence the impact down-move yields. But the unemployment rate is down to 4.2%. That was enough to prevent this report from being an outright bull story for Treasuries.
In many ways, the unemployment rate is the more important number for the markets. It historically wasn’t. But the debate on where the replacement rate is on the employment change has downsized its importance relative to where it was.
The three-month moving average is now at 111k, which is okay. At the same time, and being data selective, the jobs number takes imminent rate hike pressure away. The 2yr yield was lower post the number, and showed a tendency to stay lower on the day.
The curve ended the day net steeper. Ahead, we note that the 10yr has shown a tendency to hug the 4.45% to 4,5% area. It got there partly on some big duration squaring (selling) into month end (June into July), but also got there quite efficiently.
We stick to the view that the long end remains heavy (yields holding up), while the front end should richen (yields fall). The richness of the 5yr area of the curve suggests the same. The juxtaposition between the calming of inflation expectations versus the resilience to the rate hike narrative is tough to square, but we think the rate hike discount is mispriced.
Dovish trend can continue in near term until oil backs up again With US markets closed, we should already start thinking about the week ahead. The week is light in terms of data, with eurozone retail sales and US weekly jobless claims likely the highlights. That means markets will have time to evaluate central bank reaction functions while also keeping an eye on oil prices.
For the ECB, markets still see a 50% chance of a rate hike in September, but notably, a July hike is fully priced out. The softer-than-expected inflation data from this week would clearly not justify another round of tightening in the near term. So, unless oil makes another move higher, or next month’s inflation numbers come in hotter, we should see a continuation of the dovish trend in euro rates.
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