Oil Price Asymmetry Keeps Euro Rates Hawkish
The reaction to rising oil prices has been asymmetrical in its impact on interest rates. When oil prices surged, the inflationary pressure had a lasting effect on inflation expectations, limiting rate cuts. Now that oil prices have eased from recent highs, the short end of the euro curve remains hawkish, with the 2Y swap rate remaining relatively high.
The European Central Bank has been striking a hawkish tone, supporting the steep hiking profile for interest rates. Despite some economic headwinds due to higher oil and gas prices, the baseline is for the economy to remain robust in 2026 and 2027. A worsening growth outlook could lead to a dovish repricing, but this is not expected to happen immediately.
The eurozone PMIs are set to tick slightly lower, but remain well above 50 points, while UK and US PMIs are expected to be strong. In the primary markets, Slovakia will syndicate a new SLOVGB for €2-3bn, Germany will auction Bunds totalling €2bn, and the US will supply a 2Y FRN for $28bn and a new 5Y Note for $70bn.