MNI US MARKETS ANALYSIS - GBP/USD Rally Tips Pair to Most Overbought Since Feb'21

US TSYS: US CPI Follow-Through Sets The Tone, PPI and Jobless Claims Ahead

• Cash Tsys have seen a sizeable bull steepening with the front end seeing follow-through from yesterday’s US CPI miss as Treasuries underperform EU and UK FI so far today. Those bids in European FI markets have aided the move along with technical breaks plus some notable flow including a 17K block buy in FV futures (~$728K DV01).
• The further impetus sees 2Y yields -10.5bp on the day at 4.64% for almost 50bps below their YtD peak of 5.12% registered just one week ago. Behind this latest 2Y move, Fed Funds still price a 22bp hike for July but there’s now just a cumulative +28bp to a Nov peak (firmly against the June dot plot of two hikes) whilst cuts to Dec’24 have built to almost 160bps. That's from 147bp at yesterday’s close, 133bp before CPI and 120bp before Friday’s payrolls.
• 2YY -10.5bp at 4.641%, 5YY -8.4bp at 3.989%, 10YY -4.5bp at 3.812%, 30YY -1.3bp at 3.934%. 2s10s of -83bps sit close to highs since mid-June.
• TYU3 trades 12+ ticks higher at 112-21 on solid volumes of 340k, just off its earlier high of 112-24+. It starts to near a key resistance point at the 50-day EMA of 113-12, with a break required to strength the bullish theme.
• Data: PPI Jun (0830ET), Weekly jobless claims (0830ET), Monthly budget statement Jun (1400ET)
• Fedspeak: Daly (’24 voter) CNBC interview (1110ET), Fed Gov Waller on economic outlook (1845ET, incl text)
• Note/bond issuance: US Tsy $18B 30Y Bond auction re-open (912810TR9) – 1300ET
• Bill issuance: US Tsy $70B 4W, $60B 8W bill auctions – 1130ET

2y Tsy yieldSource: Bloomberg

EUROZONE ISSUANCE UPDATE:

Gilt syndication update:

• 0.625% Mar-45 linker tap: Size set at GBP3.5bln nominal, books closed in excess of GBP39bln, spread set at 0.125% Mar-44 linker +4.0bp.

Italy auction results:

• E4.5bln of the new 3.85% Sep-26 BTP. Avg yield 3.71% (bid-to-cover 1.43x).
• E3bln of the 3.7% Jun-30 BTP. Avg yield 3.9% (bid-to-cover 1.4x).
• E1.25bln of the 3.25% Mar-38 BTP. Avg yield 4.37% (bid-to-cover 1.74x).
• E1.25bln of the 3.85% Sep-49 BTP. Avg yield 4.45% (bid-to-cover 1.77x).

FOREX: AUD, NZD Remain Primary Beneficiaries of USD Weakness

• The USD downtick post-CPI has extended into a second session, helping keep the greenback under pressure against all others in G10. As was the case Wednesday, the main beneficiaries have been AUD and NZD currencies, which continue to erase a large part of the losses posted in late June, with AUD/USD continuing to narrow the gap with the $0.6900 handle - a move above which would put prices at the best levels since mid-February.
• The USD Index has again plumbed a new pullback low, putting the pullback from the early July high above 3%. The moves accompany continued softening in market-implied Fed rate pricing, with the peak rate in November dropping close to 10bps over the past two sessions.
• The winning streak in GBP/USD extends to six sessions, putting prices at best levels since April last year. This opens next resistance at the Apr21 high of 1.3090 and the 1.00 projection of the May 25 - Jun 16 - Jun 29 price swing. This week's spot rally has forced markets to significantly mark up the implied odds of further GBP/USD strength into year-end. Options markets now imply a 25.6% chance of spot above 1.35 by year-end (and 8.3% above 1.40), up from 13.2% and 3.9% this time last week.
• Given the outsized market reaction to CPI yesterday, PPI comes into focus ahead as markets look for similar clues of slowing inflation pressures. June PPI is expected to slow to 0.4% on a Y/Y basis, and down to 2.6% ex-food and energy. Central bank speakers due Thursday include Fed's Daly and Waller as well as the release of the ECB accounts from the June policy decision.

GBP/USD Puts Pair at Most Overbought in Over Two Years

• The winning streak in GBP/USD extends to six consecutive sessions, with spot convincingly clearing 1.30 to put prices at the best levels since April last year - opening next levels of resistance at the Apr21 high of 1.3090 and the 1.00 projection of the May 25 - Jun 16 - Jun 29 price swing.
• On a technical basis, the GBP/USD run higher is now comfortably overbought. The 14d RSI has been boosted to 75, making the pair the most overbought since Feb'21 - where GBP/USD underwent a sharp rally from ~1.37 to ~1.42 - as the currency benefited from fading expectations of BoE NIRP as well as government planning for an end to COVID lockdowns. Back then, the subsequent unwind of the overbought condition saw the pair shed 4% over the next calendar month.
• A similar response this cycle would see the pair return to test support at the 50-dma of 1.2609 - a move that would likely have to be predicated by a significant downward repricing of Bank of England rate hike expectations - the peak rate remains above 6.00% in OIS terms, although has moderated considerably (over 50bps) off the cycle highs pre-nonfarm payrolls last week.
• This week's spot rally has forced markets to significantly mark up the implied odds of further GBP/USD strength into year-end. Options markets now imply a 25.6% chance of spot above 1.35 by year-end (and 8.3% above 1.40), up from 13.2% and 3.9% this time last week.

FX OPTIONS: USD Weakness Pulls G10 Spot Away From Largest Strikes of the Week

A busy NY cut for roll-off of option expiries on Thursday - the USD weakness post-CPI has drawn spot G10 away from some of the larger strikes of the week, but still a number worth watching:

• Rally in EUR/USD spot has cleared lumpy expiries layered between 1.0820 - 1.10 leaving nearby strikes at: $1.1050-60(E989mln), $1.1080-00(E1.3bln), $1.1115-25(E1.1bln)
• Similarly, pullback in USD/JPY puts spot within range of:Y138.75($795mln)Y138.85-95($568mln)
• AUD/USD: $0.6780-00(A$1.4bln)
• USD/CAD: C$1.3200-10($748mln)
• USD/CNY: Cny7.1500($1.4bln)

EQUITIES: E-Mini S&P Continues Post-US Inflation Data Advance

• Eurostoxx 50 futures are holding on to this week’s gains. The break higher has resulted in a move above the 50-day EMA at 4331.70 and price is through 4371.00, the Jul 6 high. Clearance of this latter level highlights a potentially stronger bull cycle and attention turns to key resistance and the bull trigger at 4447.00, the Jul 3 high. Key support and the bear trigger has been defined at 4220.00, the Jul 7 low.
• A bull theme in S&P E-minis remains intact. Yesterday’s gains resulted in a break of resistance at 4498.00, the Jun 30 high. This confirms a resumption of the uptrend and maintains a bullish price sequence of higher highs and higher lows. The contract has also traded through 4500.00 and this opens 4532.08, a Fibonacci projection. First support lies at 4428.89, the 20-day EMA. Clearance of this level would be a short-term bearish development.

COMMODITIES: WTI Futures Continue to Trade Above Key Resistance at $75.70

• The current bull cycle in WTI futures remains intact. The contract has recently breached $72.72, the Jun 21 high and yesterday’s move higher resulted in a break of key resistance at $75.70, the Jun 5 high. This strengthens current bullish conditions and paves the way for a climb towards $78.03, a Fibonacci retracement point. Key short-term support has been defined at $66.96, the Jun 12 low. Initial support is at $71.83, the 20-day EMA.
• Gold traded higher again yesterday and in the process managed to trade through resistance at the 50-day EMA. The average intersects at $1944.4 and the break signal scope for a continuation of the current corrective cycle. This opens $1968.00, the Jun 16 high. Key resistance has been defined at $1985.3, the May 24 high where a break would highlight a stronger reversal. Key support and the bear is at $1893.1, the Jun 29 low.