Rates Spark: The damage has been done
The desk views the current elevation in US real yields as a critical factor that will influence FX dynamics, particularly as the market adjusts its outlook post-Iran deal. Per the full note , the US 10-year real yield remains structurally higher, hovering above 2%, while inflation breakevens have settled around 2.3%. This backdrop creates a less favorable environment for sustained rallies in pairs like EUR/USD and GBP/USD, which are sensitive to US yield fluctuations.
What the desk is arguing
The desk asserts that despite a recent dip in oil prices supporting a decrease in bond yields, we are unlikely to see a return to pre-war yield levels. Per the full note , inflation concerns have not dissipated enough for real yields to collapse further, keeping the US 10-year yield around 4.45%.
The expectation is that US real yields will stabilize at elevated levels, influenced by persistent inflation and shifts in monetary policy, especially with the ECB close to announcing further rate hikes. This aligns with the current sentiment among market participants, as reflected in various bond and inflation metrics.
Where it sits in our coverage
Currently, the EUR/USD trades at 1.1567, with a consensus target for March 2026 set at 1.1700 (range: 1.1200–1.2000), while GBP/USD is at 1.3100 with a consensus target of 1.3400 (range: 1.2400–1.3800).
- DanskeBank targets EUR/USD at 1.1866 for March 2026
- DeutscheBank sees GBP/USD at 1.3500 for March 2026
- HSBC is aligned with both currency pairs at 1.3500 for GBP/USD and 1.1700 for EUR/USD
The desk's outlook broadly aligns with the consensus targets for EUR/USD but slightly diverges for GBP/USD as the desk remains more cautious about rapid appreciation compared to JP Morgan, which also sees targets around 1.3400 for GBP/USD.
How other firms see it
Market sentiment is split, with DeutscheBank and HSBC aligned towards further upside for EUR/USD, while Morgan Stanley takes a more cautious stance indicating limited potential for appreciation, particularly in GBP/USD.
The trajectories of EUR/USD and GBP/USD are intrinsically tied to the central bank rate paths, with the upcoming ECB decisions set to influence movements significantly. Additionally, US inflation trends continue to play a crucial role in shaping market expectations around the USD's strength versus these major pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US 10-year real yields remain elevated, influencing FX dynamics.
- 02Inflation pressures keep bond yields sticky despite recent dip in oil prices.
- 03Consensus targets show a cautious approach to currency pair appreciation.
- 04Monetary policy decisions will play a vital role in shaping forthcoming trends.
Market implications
Traders should keep an eye on US Treasury yields, particularly the 4.45% level for the 10-year, as any significant moves could affect EUR/USD and GBP/USD dynamics. With the ECB expected to announce further rate hikes, volatility in these pairs is likely.
Risks to this view
A reversal could occur if the inflation outlook shifts unexpectedly, leading to lower inflation expectations and consequently pressing down real yields significantly. Additionally, any major shifts in the geopolitical landscape surrounding the US-Iran discussions or oil supply disruptions could quickly change the equation.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Citi | Bearish | 1.0850 |
Crédit Agricole | Bearish | 1.1300 |
J.P. Morgan | Bearish | 1.1300 |
Articles Rates Spark: The damage has been done 18:42 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download A slide lower in oil prices has helped rates dip, but we're not returning to pre-war yield levels. The US 10yr real yield is likely to remain elevated, and US inflation breakevens have little room to fall further. The ECB has already hiked once, and at least another hike is discounted.
We anticipate more oil price volatility as a big reserve rebuild kicks off Padhraic Garvey, CFA , Benjamin Schroeder and Michiel Tukker Lower oil prices help, but we still expect bond yields to remain elevated due to inflation Treasury yields to remain sticky to the upside, as real yields remain elevated The Iran deal gets signed physically on Friday. But already apparently 'electronically signed'. The proof will come from the Strait, and the beginnings of a reopening is all markets care about.
President Trump has promised this from Friday onwards. Reaction so far on the rates market has been predictably muted. Well before this deal, breakeven inflation rates had been falling.
They are now back to where they were before the war started, which is quite remarkable (US 10yr breakeven at 2.3%; a perfect score). US real yields are structurally higher by some 40bp since before the war, which, again, is quite remarkable. We doubt they collapse lower, which is why the 10yr yield will remain elevated.
It's down post the deal announcement, but not by much. The 10yr yield is holding in the 4.45% area, where it has tended to hover in recent weeks. The 10yr real yield is just above 2%, which is broadly a neutral valuation, one that we saw before the GFC / pandemic impacted years.
Barring a recession, it can hold in this area. We broadly move on now. The US/Iran discussions continue.
The Strait eases up. And the market discount for structurally negative inflation repercussions continues to ease. But note, we still have elevated inflation prints to deal with, as inflation is already elevated.
And there is another month or so of follow-through to come on this. It makes it tough to get overly bullish on bonds, at least not given what we know. Don't expect rates to return to when everything started Brent prices have now dropped from close to US$100/bbl down to almost US$80/bbl in the span of less than two weeks.
However, over the same time span, the market has already come to the conclusion that much of the damage has been done, and the overall reaction function of rates to the geopolitically driven oil prices has already settled at a higher level. That means, while oil is at its lowest point since early March, 10y EUR swap rates are still around 3%, a level that has marked a soft floor to the long end rate over the past few months. The European Central Bank has, of course, already created facts in the meantime by delivering a rate hike last week.
Sources & References
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