In the latest Rate Check episode, George Saravelos (Global Head of FX Research) and Ioannis Sokos (Rates Strategist) join to discuss key trends in global rates and FX markets.
1. Global Macro & US Dollar Outlook: Transitioning to Neutral
The broader market has settled back into a defined range, primarily driven by Brent crude oil dipping back below the $100 per barrel mark. Client focus has visibly shifted away from geopolitical headlines and toward US macroeconomic data, inflation, and Federal Reserve policy.
Deutsche Bank has shifted its view on the US Dollar (USD) from pessimistic to neutral, particularly regarding the EUR/USD pair, due to a tug-of-war between conflicting cyclical and structural drivers:
Bullish USD Drivers: Persistent oil prices around $100/bbl favor the US as an energy exporter.
Bullish USD Drivers: Additionally, US economic data has strengthened across both the labor market and inflation.
The "AI Inflation" Factor: Emerging data from the past two months indicates that Artificial Intelligence (AI) is proving inflationary.
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The "AI Inflation" Factor: Rather than impacting the labor market, it is driving up CPI metrics for software and imported capital goods.
The "AI Inflation" Factor: Because the AI cycle is global this year, it is also supporting broader global growth, particularly in Asia.
Bearish USD Drivers: Offsetting the US strength is a rising probability of a Russia-Ukraine peace deal during the summer, which would significantly boost the Euro.
Bearish USD Drivers: Furthermore, any medium-term resolution to the Iran war that shifts regional power away from the US could structurally impair the dollar's global standing.
The Kevin Warsh Fed Era
Following his recent confirmation, Federal Reserve Chair Kevin Warsh faces an asymmetric market pricing environment. While Warsh made dovish remarks during his Senate confirmation hearing—hinting at a focus on trimmed mean inflation (then at 2.8% vs. headline at 3.8%)—US inflation indicators have since deteriorated, with no gauge tracking below 2.5%. The market is currently pricing a very modest Fed cycle compared to the ECB, heavily discounting upside risks via a "Trump or Warsh dovish risk premium". Analysts expect the market to aggressively test Warsh’s inflation credentials early on.
2. European Government Bonds (EGBs) & The ECB June Hike
The front end of the European yield curve remains tightly correlated with oil futures due to Europe's high sensitivity to energy prices. However, deeper risks lie further out the curve.
Complacency on Term Premium: The market appears complacent regarding long-term fiscal risks.
Complacency on Term Premium: Independent of the Iran war's outcome, Europe faces an intensified urgency to increase structural fiscal spending on defense, energy security, and technology.
Complacency on Term Premium: This structural spending implies that upside yield risks are underpriced, favoring higher term premium positions over pure curve steepeners.
The June ECB Hike: Deutsche Bank expects the ECB to deliver its first rate hike in June since 2023.
The June ECB Hike: While the market is pricing roughly 60 basis points of hikes for the year, Deutsche Bank’s house view forecasts only two hikes.
The June ECB Hike: Consequently, the June move is anticipated to be a "dovish hike"—a defensive reaction to a supply shock rather than the onset of an aggressive tightening cycle.
Spread Compression & Politics: European sovereign spreads have underperformed corporate credit because the ECB is hiking for "bad reasons" (a supply shock) while high-debt nations possess limited fiscal flexibility.
Spread Compression & Politics: Despite this, the historic theme of Eurozone convergence remains intact, as "Eurozone breakup" tail risks have vanished.
Spread Compression & Politics: Looking ahead, the French presidential election next year will be a critical focal point, not just for French sovereign bonds (OATs), but for its broader impact on the foundational Franco-German alliance and future European fiscal solidarity.
3. Regional Currency Themes: UK Sterling & Latin America
Constructive on the British Pound (GBP): Analysts are bullish on Sterling for the summer.
Constructive on the British Pound (GBP): A sizeable short position has re-accumulated in the market following political volatility from local elections.
Constructive on the British Pound (GBP): With high carry and compressed volatility making shorting GBP expensive, the currency is expected to grind higher relative to peers where the market has overpriced central bank hiking paths.
Constructive on the British Pound (GBP): Investors are heavily monitoring the June 18 Makerfield by-election, where an Andy Burnham victory is widely seen by the market as a precursor to him eventually replacing Prime Minister Keir Starmer.
Latin American Political Volatility: Politics will dictate the summer macro narrative, particularly in Latin America, kicking off with the first round of the Colombian presidential election.
Latin American Political Volatility: The Colombian Peso (COP) has notably outperformed, rallying 4% against the USD over the final weeks of May.
4. Top Actionable Summer Trades
Rather than directional bets on the USD, Deutsche Bank’s strategy blueprint prioritizes relative value crosses and curve dynamics.
FX Blueprint Top Pick
Strategy
Currencies to Long
Currencies to Short / Funders
Investment Thesis
Relative Value Crosses
AUD, NOK, BRL, GBP, HUF
EUR, CHF, USD, CAD, NZD
Target high-yield assets that benefit from elevated commodity prices, offer strategic supply autonomy, or represent compelling European convergence plays. Fund against structurally underperforming European currencies, or hawkish central banks masking negative output gaps (e.g., Canada, New Zealand).
Australia (AUD) & Norway (NOK): Positioned as safe-haven beneficiaries of global energy security and resource demand.
Brazil (BRL): High carry backed by a structurally improving external account, driven by unique trade agreements spanning the US, Europe, and China.
Fixed Income Top Pick
Higher Term Premium Trades: Analysts favor positioned curve expressions that target higher term premiums further out the curve, anticipating an additional 10 to 15 basis point sell-off in 10-year US Treasuries and German Bunds.
Higher Term Premium Trades: This is viewed as a superior risk-reward profile relative to highly volatile, headline-driven front-end directional trades.
Capital Group: 2026 Midyear Outlook | 16 July 2026
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