EGBS: German Curve Bull Flattens, Broadly Looking Through Soft Bund Auction

• G10 currency markets are trading with moderate adjustments Monday, as markets digest increasing China/Japan tensions over the weekend and await a busy calendar of central bank decisions ahead. Despite US yields continuing to edge higher, the USD index holds close to unchanged, hovering within 20 pips of the recent pullback lows.
• EURUSD was given a brief boost in early trade, matching its 1.1672 Friday high after ECB Executive Board member Schnabel noted that she is “rather comfortable” with markets pricing the next move from the ECB as a hike. The recent break above 1.1656 in EURUSD highlighted a potential reversal, although topside momentum has failed to immediately gain traction.
• JPY meanwhile is a modest underperformer after Chinese military aircraft breached Japanese airspace and Q3 Japanese GDP was downwardly revised. Moves have been contained, with USDJPY broadly remaining in a 155.00/50 range as verbal jawboning from Finmin Katayama somewhat offsets the yen pessimism.
• AUDUSD traded up to 0.6649 overnight and the subsequent dip as remained very shallow.  This follows 10 consecutive sessions of higher highs as we approach tomorrow’s RBA decision. With a hold tomorrow widely expected, the tone of the statement and press conference will be scrutinised given the recent increase of hike pricing in 2026.
• Elsewhere, NZDUSD has been edging closer to the medium-term pivot at the 0.5800 mark, while USDCAD is holding the entirety of its post-data plunge from Friday. Technical developments have significantly bolstered the bearish USDCAD theme, following a breach of the bull channel and clean break of 1.3888.
• NY Fed inflation expectations is the main datapoint for today, while ECB's Cipollone and Villeroy as well as BoE's Taylor and Lombardelli are scheduled to speak.

Gilts sell off on bearish cues from EGBs in the wake of some typically hawkish remarks from ECBs Schnabel and firming wage indications in the latest REC report on jobs

• Futures trade as low as 90.88, basing just above the December 2 low (90.87).
• Bullish short-term technicals remain intact despite today’s sell off.
• Fresh extension lower would target the November 25 low (90.53), while resistance comes in at the November 27 high (91.93).
• Yields 3-4bp higher, 5- to 10-Year zone leads the weakness.
• Gilt/Bund spread little changed around 168bp.
• Gilt outperformance vs. Bunds stalled around the 165bp level last week, after the spread tightened by ~25bp since November 12.
• The speed of the tightening, coupled with ongoing medium-term UK fiscal fisks, have been cited as limiting factors by some.
• BoE-dated OIS still pricing over 80% odds of a December rate cut.
• SONIA futures flat to -5.0. Terminal rate pricing 3.42% after trading between 3.30-3.35% for much of last week. November lows in SFIZ6 (96.550) remain untested.
• Comments are due from BoE's Taylor (17:00) & Lombardelli (18:30), although the topics of their addresses may limit the scope for comments on monetary policy.
• Further out, UK monthly economic activity data is due Friday.