GILTS: Off Lows After Services PMIs, Q4 Rate Cut Odds Still Look Too Low

• JPY is the poorest performer in G10 - as was the case ahead of the US open yesterday - as yawning yield spreads against the US and further stress in longer-end global yields favours USD/JPY. The pair crossed the 200-dma overnight at 148.86 - pierced for the first time since early August.
• GBP trades poorly again Wednesday, as the UK government confirmed the date of the Autumn Budget - November 26th - which should shift focus to potential policy leaks and trial balloons from the Chancellor as she looks to gauge market response to future plans to plug the hole in public finances, likely via further tax revenue raising measures (likely targeting property), although further speculation that the government could ditch their manifesto pledge of not raising national insurance, income tax or VAT rather than raising indirect taxes.
• The growing negative correlation between longer-end yields and GBP extending this morning. The recent drop in spot and renewed fiscal concerns are supporting a bid in vols: 3m implied has been marked higher to 8 points this morning, erasing the summer lull and returning above the YTD average of 7.8 points. This raises the risk of GBP/USD downside in the coming months, isolating 1.3144/42 as key support - the 38.2% retracement for the YTD upleg, as well as the August 1st low.
• US JOLTs data is the market focus for the US session - and as was the case for the ISM data yesterday, markets will be looking to gauge labour market strength into this Friday's payrolls report. Fed's Musalem is set to speak on the economy and policy ahead of the later release of the Beige Book, while BoE MPC members appear in front of the Treasury Select Committee at 1415BST/0915ET.

The next positioning Roll to come will happen next Week, rolling CME FX September Positions into December, expiry will be on Monday the 15th Sep.

PACE for now:

• EUR: 5% (below Pace).
• GBP: 4% (below Pace).
• JPY: 17% (above Pace).
• CHF: 2% (below Pace).
• CAD: 3% (below Pace).
• AUD: 6% (above Pace).
• NZD: 2% (below Pace).
• SEK: 2% (below Pace).
• NOK: 2% (below Pace).

• The growing negative correlation between longer-end yields and GBP is extending this morning. The recent drop in spot and renewed fiscal concerns are supporting a bid in vols: 3m implied has been marked higher to 8 points this morning, erasing the summer lull and returning above the YTD average of 7.8 points (which is already well above 2024's 6.9 points).
• In tandem, the front end of the GBP risk reversals curve has deteriorated: dropping to lowest since March against USD and lowest since July against EUR - signalling decent demand for GBP downside insurance covering the rest of 2025 - despite the continued pricing-out of further rate cuts into year-end 2025.
• GBP options activity was ahead of average yesterday, and that trend's persisted into Wednesday: decent demand for downside exposure is the driver here. So far today, close to $4 in puts have traded for every $1 in calls, with 1.31 and 1.29 put strikes garnering the most notable interest. Some of the more sizeable trades across these strikes are consistent with put spreads targeting an October/November expiry - so rolling off just prior to the UK Budget on November 26th with a break-even below ~1.3025 at expiry.
• As a result, the GBPUSD vol surface is leaning further in favour of OTM puts, tipping the GBPUSD SMILE to its sharpest skew since the April Liberation Day vol episode. This raises the risk of GBP/USD downside in the coming months, isolating 1.3144/42 as key support - the 38.2% retracement for the YTD upleg, as well as the August 1st low.
• Scrutiny over UK press will now increase: policy proposals are usually floated in the media ahead of the Budget - allowing ministers to phase-in any fiscal bad news and retain rabbit-in-the-hat style positive policy surprises on Budget Day itself.