FOREX: FX OPTION EXPIRY

• Japanese yen volatility has been the key feature for G10 FX markets on Tuesday, following details emanating surrounding the discussions between US and Japanese administrations. The US Treasury provided a read out of the Treasury Secretary and Japan FinMin meeting, with Bessent emphasizing the need for sound monetary policy to keep inflation expectations anchored and avoid FX volatility.
• USDJPY is currently down 0.65%, with the 151.76 session lows marking a 1% correction from yesterday’s highs of 153.26. First important support to watch lies at 151.09, the 20-day EMA.
• Weakness for GBP in early trade puts GBPUSD through yesterday’s lows of 1.3311 on decent volumes: GBP futures volumes suggest a flow-driven move rather than a headline or news trigger spell of weakness. The fiscal picture remains the key driver more broadly, particularly given the increasing signs that the Chancellor will have to raise income tax at this month’s budget to fill a widening fiscal hole. The GBPUSD bear trigger remains 1.3249, the October 14 low.
• NOK meanwhile also underperforms on pressured oil prices as fears around how much crude is actually coming off the market from earlier Russia sanctions have somewhat subsided. Expect global developments to continue dictating NOK price action in the near-term, with little in the way of market moving domestic data due ahead of Norges Bank's November decision. EURNOK stands at 11.67, with next resistance at 11.83, the Oct 17 high.
• Attention turns to central banks for the remainder of the week, with the Bank of Canada and FOMC both firmly seen to deliver cuts tomorrow, while the BoJ and ECB are expected to hold rates in their respective meetings on Thursday. Australian CPI and Spanish GDP are due Wednesday.

10-year Gilt yields are hovering just above a key support zone. A clear break of trendline support drawn from the November 2022 low (around 4.35% today) would set the stage for a deeper pullback in yields. Gilts are outperforming German bonds across the curve, with the 10-year Gilt/Bund spread down 2bps on the session and below the year-to-date low of 177.5bps seen in March.

• There are increasing signs that UK Chancellor Reeves will have to raise income tax at the November 26 budget to fill a widening fiscal hole, and potentially increase headroom above the ~GBP10bln seen at previous fiscal events. The FT reported yesterday evening that the OBR is expected to cut its trend productivity forecast by 0.3pp.
• The Gilt curve has bull steepened, with 2-year yields down 3bps and 30-year yields down 2.5bps. Meanwhile, the German curve has seen a horizontal shift lower, with yields down 0.5-1bp across tenors.
• In futures, Bunds are +10 ticks at 129.67, while Gilts are +23 at 93.88. A bullish theme in Gilt futures remains intact.
• There’s plenty of EGB supply due today, which is likely containing rallies at the short-end. Germany will come to the market today with E4bln of the 2.20% Oct-30 Bobl, while Italy is holding a BTP Short Term auction. Slovakia and Finland are also holding syndications today, the latter a USD issue.
• The ECB’s Q3 BLS broadly echoed the signals from yesterday’s September credit data and SAFE survey. ECB 1/3/5-year consumer expectations were steady at 2.7%, 2.5% and 2.2% respectively.
• Focus remains on Thursday’s ECB decision, alongside the Eurozone flash Q3 GDP and October inflation readings. In the UK, fiscal headline alongside any UST spillovers will be in focus. 

• A new "Industrial Group" of countries will push for changes to key European Union policies, officials say -- On MNI Policy MainWire now, for more details please contact sales@marketnews.com