OUTLOOK: Price Signal Summary - Resistance In Bunds Remains Exposed

As markets consider the EU's retaliatory steps against the US, news this morning affirms that the UK are unlikely to meaningfully push back against US measures - an outcome that adds to the case for GBP underperformance through tariff uncertainty.

• UK PM Starmer announced that the "world has fundamentally changed" and has formally diluted electric vehicle targets for UK car production as well as potentially suggesting fiscal rules could be tweaked to combat an expected lower rate of growth. These policy actions stop well short of the Canadian, Chinese or likely EU response of counter-tariffs and restrictions - all of which carry an inflationary impulse.
• The contrasting official responses expose GBP here, suggesting inflationary pressure from UK countermeasures is low relative to the EU, and the argument for greater government support for businesses is more contained - leaving BoE pricing more subject to easing relative to the ECB.
• We noted above that EURGBP has cleared resistance to open 0.8645 and 0.8768 - meanwhile GBP/USD is meeting the 200-dma at typing (1.2813), to target 1.2784 and 1.2654, the 50% retracement for the YTD rally.

• +5,340 FVM5 109-20, post time offer at 0659:42ET, DV01 $220,000. The 5Y contract trades 109-18 last (+7.25).

Latest from Politico following last week's court judgement against RN Leader Le Pen:

• "Two high-ranking officials from France’s biggest far-right party publicly opened the door on Monday to bringing down the government a week after Marine Le Pen was convicted of embezzlement and subsequently barred from running for president".
• "National Rally President Jordan Bardella and party Vice President Sébastien Chenu revealed in separate interviews that the party is contemplating ousting Prime Minister François Bayrou, just four months after backing the French left’s effort to take down his predecessor, Michel Barnier."

The 10-year OAT/Bund spread has seen marginal widening to ~79bps since the report's release at 1150BST/1250CET, now approaching 4bps wider on the session.

• French Political risks have taken somewhat of a backseat in recent months (superseded by German fiscal developments and US tariff concerns), following the successful passing of the 2025 budget. However, PM Bayrou's Government relies on RN support in the National Assembly.
• A successful censure motion, would re-introduce political risks into the outlook, with Politico noting that "A government collapse would increase pressure on President Emmanuel Macron to call new elections this summer, as France’s majority-less, fragmented legislature continues to struggle with instability and deadlock".