FED: FOMC Post-Feb Payrolls Commentary Not Alarmist

Gilts badly lagged across the European government bond space Wednesday on a perceived heightening in political risk.

• The prediction-market implied probability rose that UK Prime Minister Starmer would leave office prematurely amid a scandal involving his appointee as US ambassador (Mandelson). In turn this heightened concerns over the UK fiscal trajectory, seeing the Gilt curve bear steepen.
• Earlier in the session, Eurozone flash January headline HICP was in line with consensus, with some variation in subcomponents; Italian flash inflation printed stronger than expected. Overall data had little impact on EGBs.
• The German curve bull flattened on the day, boosted by a pullback in European equities, with periphery/semi-core EGB spreads widening as part of a risk-off move.
• Industrial data is of some interest Thursday including German Factory Orders, but the clear focus will be central bank decisions.
• Those are of course the BOE (MNI preview) and ECB (MNI preview).

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.9bps at 2.094%, 5-Yr is down 3.2bps at 2.431%, 10-Yr is down 3.2bps at 2.859%, and 30-Yr is down 2.6bps at 3.524%.
• UK: The 2-Yr yield is up 0.7bps at 3.715%, 5-Yr is up 1.3bps at 3.966%, 10-Yr is up 2.9bps at 4.546%, and 30-Yr is up 4.4bps at 5.332%.
• Italian BTP spread up 0.4bps at 61.1bps / French OAT up 1.2bps at 58.8bps

• The ECB is unanimously expected to leave rates on hold at tomorrow's ECB decision.
• There is a minor easing bias priced in for 2026 as a whole but rate cut calls remain few and far between across analysts, with only BofA and Morgan Stanley formally looking for cuts amongst the 27 views reviewed below. 
• There are widespread expectations of rates on hold through 2026, with the exception being SocGen and TD Securities looking for a 25bp hike at the end of the year.
• Of those specifying rate hike views, most expect them to start in the middle to second half of 2027.
• See the full MNI ECB Preview here (link). 

• RES 4: 0.8797 High Dec 17   
• RES 3: 0.8746 High Jan 21 and a key resistance  
• RES 2: 0.8702 50-day EMA
• RES 1: 0.8675 20-day EMA
• PRICE: 0.8645 @ 16:15 GMT Feb 4
• SUP 1: 0.8613 Low Feb 04
• SUP 2: 0.8597 Low Aug 14
• SUP 3: 0.8578 Low Jul 2 ‘25 
• SUP 4: 0.8544 50.0% retracement of the Dec ‘24 - Nov ‘25 bull cycle

A bear cycle in EURGBP remains in play, despite the modest rally on Wednesday. This week’s break lower reinforces these bearish conditions. The breach of 0.8644, the Jan 6 low and a bear trigger, confirms a resumption of the downtrend and maintains the price sequence of lower lows and lower highs. 0.8620, 38.2% of the Dec ‘24 - Nov ‘25 upleg and the Feb 03 low, has been pierced. This opens 0.8597, the Aug 14 low. Key resistance has been defined at 0.8746, the Jan 21 high.