GILTS: Recovery Stalls On X-Market Cues, Familiar Fiscal Risks Remain Evident

Global cues continue to dominate ahead of the weekend, with gilts away from recovery highs alongside the latest selling flow in U.S. Tsys.

• Futures operate in a 90.26-68 range on the day, last little changed at 90.45.
• The contract broke next support in early trade, deepening the bearish pressure, with moving average studies already in a bear mode set up.
• Further weakness would expose Fibonacci support (89.94), while initial resistance is located at the September 24 high (91.28).
• Yields ~1bp higher across the curve.
• Ongoing fiscal deterioration continues to limit any gilt rallies at this stage and keeps the curve steepening theme intact, with 2s10s and 5s30s remaining within their steepening trends despite the recent pullbacks.
• Increasing pressure on PM Starmer is also noted, but this hasn’t become a meaningful issue for markets as of yet.
• The PM has stressed that financial prudence is non-negotiable, with Chancellor Reeves recently flagging that UK borrowing costs are still too high against a “still pretty precarious” fiscal situation.,
• The recent hawkish direction of travel continued in the GBP short end this week, with less than 5bp of easing priced through year-end. We think that the market is underestimating the odds of further easing in the short-term, but fiscal pressures and the recent run of domestic data, as well as spill over from the U.S., limits any dovish adjustment at this stage.