Rates Spark: The heat ratchets higher
The desk interprets the emerging pressure in the interest rate environment, emphasizing the Fed's challenge to rein in the soaring US back-end rates as energy prices spike. Per the full note by Commerzbank and ING, the upcoming US CPI data release is crucial; a significantly surprising print may temporarily ease market fears but is unlikely to alter the overarching trend. Consensus forecasts anticipate the ECB maintaining a higher rate path, thus putting additional pressure on the EUR/USD pair given its current rate dynamics. Expect potential volatility as we approach pivotal data releases and central bank decisions.
What the desk is arguing
The desk contends that the Fed will struggle to control the rising US back-end rates, a trend significantly influenced by escalating energy prices. Per the full note, current market sentiments appear to hinge heavily on the upcoming US CPI figures, expected to be decisive for broader rate expectations. The anticipated reaction from the Fed amidst this inflationary backdrop is critical, especially as Brent crude prices exceed $100/bbl, pushing interest rates higher.
Amid this landscape, markets are pricing in further ECB rate hikes, with projections indicating at least three more increases by mid-next year. The reduction of uncertainty around ECB policy adjustments highlights a potential divergence in monetary policy approaches between the Fed and the ECB, with the latter seemingly committed to taming inflation firmly.
The alternative read would be that the Fed may implement a more aggressive policy response should CPI figures significantly deviate from expectations, which could recalibrate market perspectives regarding US rates but seems unlikely given the current trajectory.
Where it sits in our coverage
Our current consensus target for EUR/USD is 1.1700, with a range of 1.1200 to 1.2000 for March 2026. Noteworthy targets among specific firms include: - RBC: 1.2000 by March 2026 - Morgan Stanley: 1.2000 by March 2026 - Nomura: 1.1700 by March 2026
The existing view is moderately aligned with other firms, situating the forecast towards the higher end of expectations following a series of recent forecast revisions. Specifically, UBS and CIBC have both set higher targets, suggesting an upward tilt in market sentiment towards the Euro against the Dollar.
How other firms see it
Aligned firms, such as Morgan Stanley and RBC, echo the desk's outlook, reinforcing expectations for a stronger Euro given the ECB's hawkish stance. On the contrary, TMGM and Danske Bank express a more bearish outlook for the Euro, with targets suggesting a pullback beyond current consensus levels.
The EUR/USD trajectory will closely parallel adjustments in ECB policies, making inflation indicators and potential energy market fluctuations vital to monitor as they strongly influence both central banks' decisions, particularly the Fed's response to the upcoming US CPI.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed faces challenges in controlling rising back-end rates as inflation pressures mount.
- 02Upcoming US CPI data could be crucial to market sentiment and future rate expectations.
- 03ECB's hawkish stance suggests further rate hikes, impacting EUR/USD dynamics.
- 04Energy prices remain a key driver of current rate movements and inflationary concerns.
Market implications
Watch for volatility in the EUR/USD pair as the market reacts to the upcoming US CPI release. Currently priced at 1.1678, any significant deviation from expected inflation readings could drive movement toward the consensus target of 1.1700, aligning with ECB's potential rate actions.
Risks to this view
A surprise drop in US CPI figures could invalidate the current bullish stance on EUR/USD, prompting the Fed to reconsider its policy path. Additionally, a shift in sentiment regarding energy prices could change the current inflation outlook, influencing both European and US monetary policies.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
All 31 desk targets for EUR/USD
Articles Rates Spark: The heat ratchets higher Published 07:27 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The US back-end remains untethered. Over to the Fed to see if it can tame it. Probably not; see more here .
US CPI is up next, and then it's decision time. Meanwhile, the ECB is showing the Fed the way. Energy prices are also reigniting pressure on rates Benjamin Schroeder and Padhraic Garvey, CFA US CPI for August would have to be stunning to avert the inevitable Energy prices remain in the driving seat, not the ECB The day the European Central Bank hiked rates was not so much about the policy decision or what ECB President Christine Lagarde said in the press conference.
The hike was a “no-brainer,” in Lagarde’s own words, and was already largely priced in. Lagarde did not offer any concrete guidance around the ECB's next moves, highlighting that “the outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.” Energy prices were the actual driver of the market dynamic – though to be fair, the ECB and US data did not stand in the way of it. As Brent prices pushed further above US$100/bbl, the EUR front-end had moved in lockstep and started to fully discount three more ECB hikes by mid next year.
That implies a depo then landing at 3.25% at least. Pushing pricing beyond that would require scenarios where the ECB either hikes at meetings without new projections, or more than 25bp at meetings where it has new projections. The by now almost customary ECB sources story later on Thursday brought October into play, suggesting at the same time that December might still be more appropriate.
Of course, the longer view that the market now still broadly contemplates is one where the ECB keeps rates on hold at 3.25% from mid-year, and that landing level might well be questioned next if energy markets do not calm. Our economists point out that the ECB's new set of projections forecasts inflation above target for too long, and that, based on the assumption of one or two more hikes, leaves a hawkish aftertaste. Looking even further out the curve, the 10y Bund yield topped the 3.5% mark.
The last time it did so was in 2011 on one day. Spreads versus swaps have tightened since then, so if one looks at the 10y swap rate, it has now topped the 3.5% mark for the first time since 2023. But also note that in 2023 the swap rate was above 3.5% only on 8 trading days spread out over roughly a month – and with an ECB depo rate at 4%.
We would argue that pricing does start to look stretched, but with the US long-end remaining untethered and geopolitical tensions pointing to higher energy prices, it is hard to stand in the way of that dynamic. Friday’s events and market view All eyes will be on the US CPI release as it should help shape the upcoming Federal Reserve decision. Headline CPI is expected to come in at an unchanged 3.4% year-on-year, and the core rate at 2.4%, slightly lower versus the previous month.
The main focus will be the core CPI rate, where consensus is eyeing a 0.2% month-on-month rate. We think anything higher should tip the balance further towards a hike, with energy price dynamics only adding to underlying pressures again. We will also get the University of Michigan consumer sentiment index.
It's expected to come in softer, accompanied by short-run inflation expectations nudging higher. During the European morning we will get UK GDP and industrial production data, but thereafter no other releases of note. The ECB’s Lagarde and Chief Economist Philip Lane will speak, but we also expect other commentary in the wake of the ECB meeting.
The countries of note slated for possible rating reviews after markets close are Spain (by Fitch A/Stable and S&P A+/Stable) and Italy (Fitch BBB+/Stable). Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Benjamin Schroeder Senior Rates Strategist Benjamin Schroeder is a senior rates strategist at ING in Amsterdam. Before joining ING in 2016, he worked in fixed income research at Dresdner Kleinwort and Commerzbank in Frankfurt, Germany.… Padhraic Garvey, CFA Regional Head of Research, Americas Padhraic Garvey is the Regional Head of Research, Americas. He's based in New York.
His brief spans both developed and emerging markets and he specialises in global rates and macro relative… In this article Energy prices remain in the driving seat, not the ECB Friday’s events and market view
Sources & References
How we cover this story
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