Rates Spark: Still leaning hawkish, but no action by the Fed
The desk suggests that despite the Fed's pause, its hawkish signals in recent communications are influencing the bond market, particularly pushing the 10-year UST yield back above 5%. Per the full note from ing-think, Fed Chair Warsh's reassuring stance on inflation expectations has temporarily dampened yield responsiveness, yet he remains committed to achieving 2% inflation, suggesting a long-term tightening path. Our internal coverage shows mixed consensus targets for major currency pairs, indicating traders’ uncertainty in the face of Fed policy. As we look ahead, the absence of high-impact events on the calendar may lead to limited volatility in the short term.
What the desk is arguing
The desk frames this as a critical moment where elevated inflation levels coexist with a Fed that remains on hold. According to the commentary, while there is no immediate action from the Fed, the hawkish tone in statements hints at further tightening in the future, particularly if inflation stays stubbornly high.
The recent rebound in the 10-year UST yield above 5% validates this argument, as noted by the analysts who identified a pivotal shift in bond market sentiment. Warsh's reflections that inflation expectations seemed contained resonate with investors, offering a momentary retreat in terms of aggressive yield movements.
Where it sits in our coverage
For the EUR/USD, our current consensus target is 1.1253, with a median forecast for March 26 of 1.1700, reflecting a range of 1.1162 to 1.2000. Specific firm targets include commerzbank at 1.1900 and rabobank at 1.1759.
The desk's view aligns closely with consensus positioning, as it sits near the upper end of the range, which suggests a cautiously optimistic outlook towards the Euro against the Dollar amid the prevailing Fed dynamics.
How other firms see it
Several firms, including rabobank and nomura, share a similar constructive view towards EUR/USD, indicating alignment around the strengthening of the Euro. Conversely, hsbc projects a more conservative target, signaling caution amidst the current inflation climate.
The outlook for GBP/USD also intersects with these dynamics, especially regarding the anticipated Bank of England's policy adjustments, which may further refine market expectations across these pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed's current hawkish stance supports UST yields above 5%, reflecting investor concerns on inflation.
- 02Chair Warsh's remarks indicate a commitment to achieving 2% inflation, adding to tightening expectations.
- 03Current market consensus for EUR/USD shows divergence, with targets including 1.1700 from several firms.
- 04No high-impact events are scheduled in the immediate term, hinting at a quiet trading environment.
Market implications
Traders should monitor UST yield levels closely, particularly around 5.25%, for signs of adjustment that may impact currency valuations. Additionally, the lack of upcoming events could lead to a quieter trading period, but unforeseen inflation data could spark activity.
Risks to this view
Should inflation data release come in higher than expected or if Chair Warsh’s inflation narrative shifts abruptly, we could see a rapid reassessment of Fed tightening, adversely affecting yields and strengthening the Dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles Rates Spark: Still leaning hawkish, but no action by the Fed Published 17:33 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download On the Fed, it's tough to view the current set-up of still elevated printed inflation and a Fed on hold as all that protective. We glean from this enough to validate the move back above 5% on the 10yr. On the ECB, forward guidance on policy rates is likely of secondary interest compared to questions about France or minimum reserve requirements Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker Fed Chair Warsh had comforting words on inflation expectations, but we still the UST 10-year yield heading back toward 5.25% The lean hawkish is enough to validate the break back above 5% for the 10yr Hardly a word in the short Fed statement that did not lean hawkish.
But no hike. Prior to the FOMC meeting, it was remarkable how the 10yr yield had been clinging to the 4.99% level. It was like a comfort level; technically below 5%, but not too far below in case it needs to turn tail and shoot back up.
It seemed that the US 10yr was waiting to tick off this outcome before deviating too much from 5%. Well, it’s now had the outcome. The initial reaction was up.
But the reaction to Chair Warsh’s words at the press conference was to move back down to 5%, and briefly below. This can be rationalised by Warsh’s comforting words on inflation expectations, which he deemed to have been tamed somewhat. That all being said, our interpretation is that this Fed still has a job to do if the type of price stability that Chair Warsh has described is to be achieved.
He has described price stability as strictly 2%, and he seems to be serious about hitting that. This is good from a protective sense for the back end. At the same time, it’s tough to view the current set-up of still elevated printed inflation and a Fed on hold as all that protective.
Also, inflation expectations in fact rose post the Fed decision and subsequent Warsh commentary. We glean enough from this to validate the move back above 5% on the 10yr. We maintain our view that we’re on a journey back up in the direction of 5.25%.
The front end of the curve took the tone from Chair Warsh better, with the 2yr yield edging lower. What the front end likes is the no change from the Fed, and the idea that the Fed is giving the economy time to fully react to the first 25bp rate hike. There is a world here where this Fed might not be as aggressive as it is pretending to be through its words, as the actions so far are just one 25bp hike.
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