Rates Spark: US inflation likely too hot for comfort
The desk believes US inflation metrics are likely to remain persistently high, implying pressure to maintain or raise interest rates. Per the full note from ING, the expectation for the US core CPI reading to hit 0.3% MoM suggests inflationary concerns are far from abating. This sets the stage for a potential firming of US yields, reinforcing demand for duration as a 10-year UST yield of approximately 5% appears increasingly attractive to investors. With no high-impact events on the calendar in the coming month, traders are left navigating these inflation signals with caution.
What the desk is arguing
The desk sees rising US inflation as a significant barrier to rate cuts, primarily due to the core CPI expectations. Per the full note from ING, a core CPI reading anticipated at 0.3% MoM signals persistent inflation pressures that may compel the Federal Reserve to reassess their monetary policy stance.
Moreover, a diminishing pass-through effect of oil prices onto rates suggests that while oil prices have moderated, the primary concern remains rooted in inflation data rather than energy costs themselves. Specifically, the notes indicate that the damage from high energy prices has already impacted inflation expectations substantially, shifting focus to possible second-round effects that could keep rates elevated.
Where it sits in our coverage
For EUR/USD, our consensus target is 1.1425, with a span of 1.1162 to 1.2000 as the median estimates across firms. Specific targets from key firms include: - Commerzbank: Dec26 1.2200 - RBC: Dec26 1.2000 - HSBC: Dec26 1.1000
This position aligns closely with prevailing sentiment; however, some firms, like Nomura, predict a higher trajectory toward 1.2000 by Dec26, indicating possible divergence in outlook among forecasters.
How other firms see it
Firms like RBC and Nomura support the notion of sustained pressure on inflation, leaning towards higher currency targets, suggesting a broadly aligned bullish stance on the US dollar. Conversely, SocGen and Citi display contrasting views, establishing lower forecasts that indicate skepticism about the longevity of dollar strength under current inflationary pressures.
Related pairs to monitor include GBP/USD, as movements in inflationary indicators from the US could heighten sensitivity in the Bank of England's decisions, potentially influencing pound valuations through interconnected dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation is likely to remain elevated, maintaining pressure on interest rates.
- 02Core CPI expected at 0.3% MoM suggests persistent inflationary concerns.
- 03With no high-impact events in the calendar, traders are focused on inflation data.
- 04The diminishing influence of oil prices on rates indicates a shift toward broader economic concerns.
Market implications
Watch for fluctuations around the 0.3% MoM CPI print; a surprise higher reading could further support the dollar. The 10-year UST yield hovering around 5% could attract significant investment if inflation remains hot, influencing at least EUR/USD and GBP/USD.
Risks to this view
A substantial decline in inflation figures could reverse the current bullish sentiment on interest rates, prompting the Fed to consider easing measures sooner than anticipated. Additionally, if geopolitical tensions escalate affecting oil markets, it could reintroduce volatility into the rates space.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Neutral | 1.1200 |
UniCredit | Bullish | 1.1600 |
Rabobank | Bearish | 1.1000 |
Articles Rates Spark: US inflation likely too hot for comfort Published 07:25 Rates Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The direct pass-through from oil to rates has weakened compared with a few months ago, as markets turn their attention to inflation data. We expect the US core CPI reading to come in at 0.3% MoM, which is too hot to support lower rates. The ongoing AI jitters do help a 10yr UST yield of 5% look relatively attractive, supporting inflows into longer rates Michiel Tukker and Benjamin Schroeder Lower oil doesn't have as strong an impact on rates as a few months ago Risk sentiment improved a tad on Monday, helped by oil easing lower and a recovery in AI stocks.
But the bid for duration seems to stick and most global 10yr rates managed to tick a few bp lower. Flows data from the last few weeks already reflected increased demand for longer-dated bonds, even before the AI jitters started. Concerns about stretched equity prices can further feed the relative value play whereby a 10yr UST yield of around 5% could look attractive.
Having said that, we still warn about the upside risks to rates in the near term. Markets are constantly rotating their attention between AI and inflation concerns, keeping volatility high. Next up is the US CPI number, which consensus still sees coming in hot at 0.3% MoM for the headline figure.
Our economist also expects the core reading to come in at 0.3%, which does not look good on an annualised basis. Brent oil ticking closer to $90 per barrel helps ease inflation risks but doesn't remove the upside risks. Rates were much more sensitive to oil prices a few months ago, but the correlation has diminished significantly.
The damage has been done in terms of higher energy costs, and the focus is rotating towards potential second-round effects. So, whilst lower oil prices take off some of the pressure from rates, inflation data has become increasingly important. Tuesday’s events and market view The main release of the day is the US CPI which is expected to come in at 0.3% m/m, still above the 0.17% level needed to average out at an annualised 2% which the Fed targets.
We will not have the annual figure as no data was collected for the yearly comparison given the government shutdown in 2025. Fed officials Waller, Logan, Schmid and Paulson will speak on Tuesday. There is no relevant data out of Europe on Tuesday, but among other things, the BoE’s Watcher conference will feature a number of central bank speakers from the BoE as well as the ECB, including chief economist Lane.
In primary markets, the EU will conduct its last syndicated sale for the year with taps of the 5y and 20y benchmarks. The Netherlands auctions 10y DSLs (up to €3bn). The UK auctions 29y Gilts (£1bn), and the US Treasury sells new 10y notes (US$42bn).
Sources & References
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