OPTIONS: More Mixed Sonia Trade Vs Recent Upside Flows

Asked in Q&A if she's in line with the Dot Plot median for 3.4% rates at end-2026 (when she is an FOMC voter) as well as her stated view that she agrees with the FOMC median estimate for 2 more cuts the rest of this year, Philly Fed's Paulson doesn't reveal much, saying "I think next year we're going to have to really evaluate the data as it comes in. We're going to have to see what happens, both with inflation and with employment and with growth. Right? I mean, I think next year is is a long way off right now."

• On where she sees the neutral rate: "We're really going to have to feel our way."
• Asked if she saw potential for rate hikes in 2026 if inflation proves to be stickier than anticipated (always a tricky question), Paulson says: "I mean, I think you can never say never about that. If inflation shows a burst of, you know, shows some life, then the Fed's going to have to react appropriately, whether that's keeping the policy rate at current levels or whether that's increasing, it is going to depend on what the data say. But I think we we need to be open to doing what it takes to achieve both of our mandates."
• Paulson says the NABE survey estimate of breakeven payroll employment (the pace of job gains that is needed to keep the unemployment rate steady) of 75,000 nonfarm payroll jobs "sounds really reasonable... I would suspect that it's lower than 75,000".
• She says "I know it's [the breakeven rate] lower than it was before... it's going to be within the standard of error. That includes some things that are negative. And so I think that's going to that's another reason why I think it's really important to look at ratios rather than those job flow numbers. Because when you've got supply and demand changing at the same time, it's really hard to assess...we've got structural things going on, at the same time that cyclical things are going on. And so that's why I'm going to be looking at at some of those ratios."

• There is little reaction to Philly Fed’s Paulson debut speech since replacing Harker after his retirement in June.
• She revealed she was indeed one of the nine dots who look for two additional cuts this year following the 25bp cut last month (the median view), as we guessed, and she wouldn’t be drawn on her rate outlook for 2026 (“I think next year is a long way off right now”).
• US rates hold today’s steady move back towards Friday’s highs, ultimately fading Trump’s weekend comments that looked to downplay China tariff threats from Friday. That’s despite US equity futures holding close to session highs having pared some of Friday’s sharp losses.
• Fed Funds futures cumulative cuts from an assumed 4.10% effective: 24bp Oct, 47.5bp Dec, 59.5bp Jan, 72bp Mar, 79.5bp Apr and 93.5bp Jun.
• SOFR futures are unchanged on the day for the Z5 before an almost uniform increase of just 1 tick looking out to end 2027 contracts.
• The terminal yield of 2.98% (SFRH7) is 2.5bp lower since the NY crossover (ahead of a Columbus Day holiday-thinned session), pointing to between 112-115bp of cuts ahead depending on fixed rate assumptions (i.e. roughly 4.5 25bp cuts in total). It’s set for the lowest close since Sep 18, the day after the FOMC decision.  

• RES 4: 1.3789 High Jul 1 and key resistance    
• RES 3: 1.3726 High Sep 17 
• RES 2: 1.3661 High Sep 18
• RES 1: 1.3443/3527 20-day EMA / High Oct 1 and a pivot level 
• PRICE: 1.3325 @ 15:47 BST Oct 13
• SUP 1: 1.3262 Low Oct 10
• SUP 2: 1.3254 Low Aug 4
• SUP 3: 1.3142 Low Aug 1 and a key support
• SUP 4: 1.3041 Low Apr 14           

A short-term bear condition in GBPUSD remains intact and last week’s extension down has strengthened this condition. The pair has breached a key short-term support at 1.3333, the Sep 3 low. The break signals scope for a deeper retracement. A clear break of 1.3280 (pierced), a Fibonacci retracement, would open key support at 1.3142, the Aug 1 low. Initial resistance to watch is 1.3443, the 20-day EMA.