Rates Spark: Sentiment looking through geopolitical risks
Current market sentiment appears to be disregarding new geopolitical tensions despite higher oil prices, which contribute to elevated inflation expectations and nominal interest rates. Per the full note source, the ongoing rise in oil prices has led to increased volatility in risk assets but has not notably spiked European bond yields. While Bunds remain stable, inflation expectations from higher oil prices could force the front end of the yield curve upward, especially if the geopolitical climate further deteriorates. Consensus forecasts for EUR/USD currently sit at 1.1700, revealing some divergences in trader expectations for the pair's trajectory.
What the desk is arguing
The desk posits that current market dynamics show resilience against geopolitical tensions, particularly those affecting oil supply. Recent statements from banks indicate that despite rising oil prices, which have historically influenced inflation, financial markets remain optimistic and are treating these spikes as manageable.
This sentiment is supported by the fact that even amid oil price surges, the volatility measures such as the VIX have reverted to pre-crisis levels, illustrating a dismissive attitude towards these geopolitical concerns. Additionally, nominal interest rates have remained elevated, further emphasizing that markets are following a 'standard playbook' with potentially bullish undertones for EUR/USD in the context of future inflation jumps.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700, within a range of 1.1200 to 1.2000. Notable projections for December 2026 include: - commerzbank: 1.2200 - goldman: 1.1200 - jpmorgan: 1.1300.
This view is somewhat optimistic, resting towards the higher end of the consensus spread, especially when considering the bullish thrust suggested by commerzbank's target, which is notably above others, signaling a potential market shift in sentiment.
How other firms see it
Several firms align with the optimistic view, expecting EUR/USD to strengthen, including commerzbank, which has a bullish stance on the pair. However, firms such as citi appear more bearish, projecting lower values at the end of the forecast period.
The current situation is intertwined with broader trends, as the EUR/USD trajectory is closely related to inflation outcomes in Europe, particularly influenced by ECB policy adjustments. Traders should remain aware of related pairs like USD/JPY as potential indicators of broader market reactions to oil price shifts and geopolitical events.
What the calendar says
No high-impact events are scheduled in the next 30 days that could directly influence the EUR/USD dynamics, suggesting a period of consolidation ahead as traders monitor geopolitical developments and inflationary trends.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Higher oil prices are supporting elevated inflation expectations and nominal interest rates.
- 02Despite geopolitical tensions, risk markets exhibit resilience, reflected in stable Bund yields.
- 03Current EUR/USD consensus stands at 1.1700, revealing divergence among forecast targets.
- 04Maintaining watch on geopolitical developments is crucial as they may impact inflation and growth.
Market implications
Traders should monitor the stability of oil prices, especially regarding the Strait of Hormuz, as any disruptions may accelerate inflation and impact nominal rates. Look for EUR/USD resistance around the upper end of the consensus at 1.1700, which may serve as a bellwether for sentiment shifts in response to geopolitical shocks.
Risks to this view
A reversal of this call could arise if oil prices stabilize or decline significantly, which would ease inflation concerns and prompt a reassessment of rate expectations. Additionally, if key growth indicators like PMIs show unexpected downturns, it could catalyze a bearish view on EUR/USD.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | — | 1.1200 |
UOB | — | 1.1445 |
MUFG | — | 1.1800 |
Articles Rates Spark: Sentiment looking through geopolitical risks Published 07:30 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Rate markets are still following the standard playbook, which means the higher oil prices are keeping inflation expectations and thus nominal rates elevated. Risk assets, however, seem to look through a revival of geopolitical worries, and Bunds do not seem to benefit from the return of market volatility Michiel Tukker and Benjamin Schroeder Recent higher oil prices are keeping inflation expectations and nominal rates elevated Risk sentiment looking through surge in oil prices already Sentiment remains in a very optimistic mood and already seems willing to look through the latest setbacks in Iran. This week’s oil spike initially triggered some volatility in risk assets, but we see European government bond spreads tighter again and the VIX is also practically back to where it was before.
Despite a nudge lower, oil prices still remain significantly higher than before, but this doesn’t seem to change the broader market outlook. Markets’ inflation expectations also remain higher than at the start of the week as rates are following the standard playbook. Oil prices are directly linked to near-term inflation expectations and are thereby adding to the upward pressure on nominal rates, especially at the front end of the curve.
We're bracing for more volatility going forward as oil prices react to new geopolitical developments. If anything, the risk seems tilted to the upside, because as long as the Strait of Hormuz remains under threat, supply constraints will start to intensify. An important question is whether growth indicators will also react to the latest moves in oil.
From an inflation perspective, the pass-through is obvious, but this time round, business sentiment might not be as sensitive to the latest headlines. If PMIs, for example, manage to continue recovering, then that would add to the upward pressure on rates. In effect, that would reassure European Central Bank members that taking a more hawkish approach may not be as damaging.
More effort needed to not have Bunds safe haven status challenged While markets saw a brief risk-off moment, a common hedge for such a scenario has not performed well. At least away from the front end, Bunds initially even cheapened versus swaps, with the switch to a new benchmark also muddying the picture somewhat. Since the start of the month, the news flow around Germany itself has been pulled in both directions, one could argue.
On the one hand, the government’s reform drive seems to be finally gaining momentum, tackling important issues such as pension reform to ensure the long-term viability of its finances. On the other hand, the government has increased its borrowing plans for the years through 2030 by another roughly €50bn, taking the overall net borrowing from 2026 through 2030 above the €1tr mark. However, both developments are perhaps not quite as impactful as the headlines suggest.
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