European government bonds have climbed while the euro and Nordic currencies sank as a result of cooled inflation figures and weak Chinese data, suggesting that the rate-hike cycle is nearing its end. Reports show that Germany’s 10-year bond rate shrank further, with inflation readings in France and Germany also slower than expected. This has led money markets to decrease their bets on additional rate hikes by the European Central Bank. As a result, the disinflationary trend has been driven forward due to Europe’s industrial slump and China’s stumbling emergence from Covid Zero policies, leaving the world economy flirting with recession. This has resulted in a negative impact on the euro and the Swedish krona, which is on track for its worst month in more than a decade.

Traders are no longer pricing in a full 50 basis points of cumulative rate increases by the ECB, instead pointing to the key rate peaking just below 3.75% by September. The deposit rate is currently 3.25%. The outcome of these results is that European government bonds will likely be traded somewhere between the highs and lows of the past month in the near future, implying a yield range of about 2.20% to 2.50% for 10-year bonds. Meanwhile, the euro has sunk, hitting 1.0659 against the dollar on Wednesday, its weakest since March.

The disinflationary trend has also weighed heavily on riskier currencies, suggesting that Sweden and Norway will stop raising rates before the ECB, leaving their interest-rate differentials unattractive to carry traders. The krona has tumbled by more than 6% compared to the US dollar this month. The Norwegian krone is also on track to lose about 5%, its worst month since September.

Financial analysts predict that further rate hikes can be avoided if an upside surprise in core inflation is excluded, with a last rate increase in September. Despite the current market being comfortably priced for additional rate hikes, moderating price data, and the threat of the eurozone facing stagnation in the second half of the year, the euro could continue to sink against the dollar in the coming weeks.

In summary, cooling inflation figures and weak Chinese data have had a negative impact on the currency market, causing European government bonds to climb while the euro and risk-sensitive Nordic currencies sink. As the disinflationary trend continues, traders are unlikely to continue pricing in any rate hikes in the coming months, which will most likely lead to a weakening of the euro and Nordic currencies in the short term.