GBP: Optionality in Focus on Any Dovish BoE Response
Headed into today's BoE decision, GBP is off recent lows and among G10's best intraday performers, but the modest bounce is clearly consolidative at these levels and will have helped alleviate the oversold position. That said, prices are still 75 pips off the weekly high.
- Optionality in the wake of the decision is worth noting: £2.2bln in option notional is set to roll-off at 1.29 at today's 10am cut - which could prove influential in any dovish reaction to the decision, particularly as the notional comprises of £2.07bln in puts and just £115mln calls.
- Despite the more constructive GBP session, EURGBP has been consolidating its position around 0.8800, with dips remaining well supported following recent bullish developments.
- The breach of significant resistance at 0.8769 has bolstered the momentum for the cross, and this week’s retest of the breakout and subsequent bounce maintain the optimistic short-term view as both the BOE decision and budget approach. Topside targets for the broader rally include 0.8835 (held Wednesday) and 0.8875, the April 2023 high.
Beyond today's decision, the Budget is quite clearly a focus, but we see GBP remaining structurally volatile even beyond that point: https://www.mnimarkets.com/articles/vol-markets-see-more-interest-in-eurgbp-over-gbpusd-into-boe-1762341301404
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OPTIONS: Larger FX Option Pipeline
- EUR/USD: Oct08 $1.1700(E1.1bln), $1.1770-80(E1.2bln), $1.1800(E1.4bln), $1.1850-60(E1.0bln); Oct10 $1.1600(E1.3bln), $1.1650(E1.7bln), $1.1700(E1.6bln), $1.1740-50(E2.5bln), $1.1780-00(E2.8bln)
- USD/JPY: Oct08 Y146.50($1.2bln), Y147.00($1.5bln); Oct09 Y150.00-15($1.9bln)
FED: Daly Doesn’t See Potential AI Bubble Threatening Financial Stability -Axios
SF Fed’s Daly gave an AI-focused interview to Axios (full report here), her first public comments since she said on Sep 25 that the policy rate remains modestly restrictive with more cuts needed over time to balance risks.
- Axios has published an interview with SF Fed’s Daly (non-voter) which it summarizes as saying that “Daly doesn't think a potential AI bubble in the stock market would threaten broader financial stability.”
- Some of Daly’s remarks from it: “I do want to caution us against thinking all bubbles are financial […] I don't see many signs that that's the case."
- “Research and economics call it more like a good bubble, where you're getting a ton of investment… Even if the investors don't get all the returns that the early enthusiasts think when they invest, it doesn't leave us with nothing. It leaves us with something productive,"
- Considering her labor market background: “she is not seeing evidence of mass job replacement as a result of AI, but she is seeing the addition of "technology in place of hiring" as the economy slows. Instead, they're leveraging AI, fueling the low-hire, low-fire labor market.”
OUTLOOK: Price Signal Summary - Bunds Remain Below Resistance
- In the FI space, the recent climb in Bund futures appears corrective. Key support and the bear trigger lies at 127.61, the Sep 3 low. Clearance of this level would confirm a continuation of the medium-term bear cycle. For bulls, a clear reversal higher would refocus attention on key resistance at 129.44, the Sep 10 high. First resistance is 128.84, 61.8% of the Sep 10 - 25 bear leg.
- Gilt futures continue to trade above the Sep 26 low. Recent weakness strengthens a bearish theme and does suggest the end of the corrective phase between Sep 3 - 11. Note that on the continuation chart, moving average studies are in a bear-mode position, highlighting a dominant downtrend. A resumption of the bear leg would open 89.94, the 76.4% retracement of the Sep 3 - 11 corrective phase. Initial resistance to watch is 91.28, the Sep 24 high.
