Rates Spark: Room for Warsh to shift the narrative
As markets adjust to the complex interplay between U.S. rate hike probabilities and inflation expectations, Chair Warsh's testimony could serve as a pivot point for sentiment. Per the full note source, there is a marked increase in the rate hike discount compared to a stabilization of inflation expectations, setting the stage for potential shifts in yield curves. Currently, the U.S. 10-year yield is above 4.6%, with heightened geopolitical tensions potentially influencing real yields and providing a backdrop for Warsh's remarks. The consensus target for EUR/USD remains at 1.1750 for December 2026, within a span indicating a relatively stable expectation amid this volatility.
What the desk is arguing
The desk posits that Chair Warsh's upcoming Congressional testimony could reinforce the trend of widening yield curves, as he may underscore the easing of inflation expectations despite the build in rate hike pricing. This narrative shift could help to steepen the curves, creating market opportunities. Per the full note source, the increase in U.S. yields is underscored by rising geopolitical tensions, particularly involving Iran, which are impacting market and inflation expectations significantly.
Further supporting this perspective, the 2-year yield has now surpassed 4.25%, compared to under 3.4% prior to recent conflict escalations. The current market pricing suggests a 25bp hike is anticipated for the September meeting, reflecting shifting investor sentiment.
Where it sits in our coverage
The current consensus target for EUR/USD stands at 1.1750, reflecting a wide range among firm forecasts: - commerzbank: 1.2200 - goldman: 1.1200 - hsbc: 1.1050
This positioning indicates that our desk's view aligns closely with the prevailing market sentiment, suggesting stability near the middle of the forecast spread. Given the ranges cited, our current perspective could diverge towards a more bullish outlook compared to some peers.
How other firms see it
Many firms are currently aligned with a bullish stance, particularly those like mufg and scotiabank, who are pricing similar outcomes for EUR/USD. Conversely, firms such as citi remain on the bearish side, reflecting a more cautious outlook on potential rate increases. The forthcoming cues from U.S. economic indicators and central bank communications will likely influence this dynamic.
The interplay between U.S. yields and European central bank policies will be crucial, especially as the EUR/USD rate trajectory mirrors broader shifts in monetary policy expectations across both regions. Additionally, the situation in geopolitics will be instrumental in determining how these rates adjust going forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Chair Warsh's testimony may influence U.S. yield curves and market sentiment.
- 02Current U.S. 10-year yields above 4.6% reflect a critical juncture in inflation expectations.
- 03The EUR/USD consensus target remains stable at 1.1750, indicating resilience amid volatility.
Market implications
Watch for any market reaction to Warsh's commentary, particularly around the 10-year yield levels. Given the current trajectory, if yields continue to rise, it could challenge existing EUR/USD resistance levels.
Risks to this view
A significant shift in U.S. geopolitical stability or unexpectedly aggressive inflation data could undermine the current narrative, prompting a reassessment of rate hike probabilities and market positions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
MUFG | Bullish | 1.1800 |
Articles Rates Spark: Room for Warsh to shift the narrative Published 16:05 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contrast the build in the US rate hike discount to the taming in inflation expectations. Chair Warsh can choose to latch on to the latter, thus steepening the curve from both ends. European markets continue to follow a hawkish playbook for central bank expectations.
Interestingly, the priced-in probability of immediate hikes in July remains minimal Padhraic Garvey, CFA , Michiel Tukker and Benjamin Schroeder Fed Chair Warsh testifies before the House Financial Services Committee on Tuesday. He could emphasise the tameness of inflation expectations Juxtaposition between the rate hike discount and benign inflation expectations The US 10yr yield breached above 4.6% on Monday, driven there by yet another nudge higher in real yields. But in addition, break-even inflation rates too have been on a renewed rising trend in the past week.
The latter coincides with the re-elevation of tensions between the US and Iran, manifesting in a concerning kinetic element. We're not quite in a state of all-out war, but the direction of travel has been more towards that, rather than a ratcheting down. And there is also the unravelling for the markets of the 20% tolls being contemplated by the US for passage through the Strait of Hormuz, and how that might pan out in the weeks and months ahead.
On the front end of the curve, the 2yr yield has breached above 4.25%. That compares with 3.4% (and a rate cut discount) before the war broke out. Now the market has a dominant discount for the next move to be a hike (there is now a 25bp hike discounted for the September meeting).
It's unclear whether Chair Warsh will have anything material to say about this as he testifies before the House Financial Services Committee on Tuesday. Unlikely, one would have thought, given his preference for no forward guidance. But he could, if he chooses, emphasise the tameness of inflation expectations.
What is interesting here is the contrast between the build of a rate hike discount and the equally impressive fall in inflation break-even rates. Even though they have risen in the past week or so, big picture they are not only back to where they were before the Iran war broke, but in absolute terms they are quite tame (2yr at 2% and 10yr at 2.25%). Tuesday's June inflation release is expected to see the headline rate fall back below 4%, reflecting falls in energy prices.
Even then, inflation remains uncomfortably high (hence the rate hike worries). But then again, the market is already discounting big falls in inflation. Chair Warsh has enough ammunition here to ride the rate hike risk and instead hold pat.
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