EURIBOR OPTIONS: M6/H6 Combo Trade

• Broader dollar strength has been extending into the NY crossover on Wednesday, as political concerns in Europe provide a moderate risk-off tone and post JH Powell positions are squeezed.
• This is contributing to GBPUSD also fully reversing the Powell induced move, although last Friday’s lows remain untested for now. This level at 1.3391 marks a key short-term support for the pair, of which a break would signal scope for a move towards 1.3315, the 61.8% retracement of the Aug 1 - 14 bull leg.
• Trendline support drawn from the year’s lows would then come back into focus, of which a breach may threaten the broader medium-term uptrend that has been evident this year. JP Morgan remain of the view that investors should be using any GBP rallies to set up bearish multi-month exposure covering the UK budget.
• JPM point out that what stood out last week is the lack of GBP strength on strong PMI and inflation data, which suggests focus may be on long end gilts and pressure on the chancellor. Sticky inflation, critiques on UK tax policy options and UK yield moves all add to UK government funding gap woes heading into the autumn budget. As part of JPM’s macro trade recommendations, they suggest keeping GBP shorts vs EUR, CHF, NOK & SEK.

SEB’s model suggests that month-end rebalancing needs for the typical Swedish portfolio manager are SEK neutral.

• In the FI space, Bund futures continue to trade above their recent lows. A bear threat remains present. The contract recently breached 128.84, the Jul 25 low and a bear trigger. Note that the 129.00 handle represents the base of a broad range. A clear range breakout would strengthen a bearish theme. This would open 128.40 initially, the Apr 9 low. Strength above the 50-day EMA of 129.78, is required to signal a reversal.
• A bear cycle in Gilt futures remains in play and yesterday’s fresh cycle low reinforces current conditions. Note that on the continuation chart, moving average studies are in a bear-mode position, highlighting a clear downtrend - for now. First support to watch is 90.25 (pierced), the Aug 26 low. A clear break of it would resume the bear leg and open the 90.00 handle. Initial resistance is at 91.24, the Aug 18 high.