Oil Price Asymmetry Keeps Euro Rates Hawkish

The relationship between oil prices and interest rates is not symmetrical, according to recent market trends. When oil prices rise to new highs, it leaves a lasting impact on inflation expectations, limiting rate moves on the way down. This means that even as oil prices have eased from their recent highs, the short end of the euro curve remains relatively hawkish.

The 2Y swap rate was around 20bp lower when oil hovered around $100 last time, indicating a significant asymmetry in the impact of oil price movements on rates. The European Central Bank's hawkish tone continues to support the steep hiking profile, and the growth outlook remains robust with eurozone PMIs mostly above 50 points.

However, a worsening growth outlook could be a catalyst for a dovish repricing, but this is not expected to happen immediately. Even if there are disappointing PMI figures for the eurozone this week, the focus will remain on inflation rather than growth dynamics.