Euro rate markets are still positioned for more than two ECB hikes and seem willing to price in more if oil prices were to rise again. In the near term, that means markets could even get pushed towards four hikes, implying a 2Y swap rate moving well above 3%. For the higher oil price scenarios, we do, however, anticipate a sharp dovish shift as growth concerns start mounting towards the end of the year. That means markets would already start eyeing ECB cuts in 2027, pulling the 2Y rate even below current levels.
For 10Y euro rates, the initial reaction to higher oil prices will still be bearish, but the scope to go higher should be limited. Growth concerns on the back of tighter monetary policy and higher energy costs should start weighing on market sentiment. In effect, this starts pushing down longer-dated rates, also explaining the 2s10s curve inversion towards the end of 2026 in the worst outcome.
The outlook is similar for US rates, with the 2Y swap reaching 4% in the highest oil scenario. Also, 10Y rates can move materially higher in the near term, even in our baseline scenario, especially since market sentiment remains resilient. With inflation numbers coming in hot throughout 2026, that upward pressure on rates should hold. When markets turn more pessimistic on the growth outlook, however, the focus should shift from inflation to recession risks. In effect, this pushes down real rates, bringing 2Y and 10Y to levels below where we stand today.