GASOLINE: Regions in Russia Facing Gasoline Shortages

Long-setting has been the theme going into Thursday's ECB decision, at least for EGBs over the past week (with Gilts bucking the trend), per our latest Europe Pi positioning update (Download Full Document Here)

• This leaves European bond futures positioning mixed, with three contracts structurally short, two flat, and two long/very long.
• These are mostly unchanged since our last update on July 7.

DUU5 107.00/107.20/107.40 call fly paper paid 5.5 on 4K.

In similar vein to yesterday’s session, GBP has relatively underperformed its g10 peers on Wednesday, as the higher beta AUD and NZD outperform amid the more optimistic outlook for trade discussions between the US & China. However, cable has still consolidated back above the 1.35 handle, further negating the bearish technical developments seen last week. Most recent analyst views point to contrasting sentiment on the short-term trajectory for sterling:

• *Bank of America: By far the most pervasive driver for GBP has been its failure to break above long-held ranges. Fiscal dominance has played its part, but this is not an issue specific to the UK. Rising global fiscal concerns and self-inflicted wounds have, however not helped the range-break cause particularly with outsized GBP long positioning. BofA feel the conditions are now in place for a bounce in GBP through the summer months.
• *Goldman Sachs have recently grown more negative on Sterling’s medium-term prospects versus European peers, underpinned by a challenging valuation picture and a lower-than-priced BoE terminal rate. But the finely balanced fiscal backdrop and large two-sided surprises in the incoming data continue to complicate the nearer-term outlook for the currency.
  • GS think a rising fiscal risk premium is the main driver of the recent outperformance of EUR/GBP versus their GSBEER model-implied estimate, and continues to dampen Sterling’s beta to front-end rate differentials. GS expect it will pay to wait for some of the elevated fiscal premium in the currency to recede, before targeting Sterling downside on European crosses at better levels.
• *Danske: The pressure on GBP has mounted as the UK economy has showed more pronounced signs of weakness, in particular in the labour market. Danske increasingly see domestic factors and the relative growth outlook between the UK and the euro area as becoming GBP negatives. Additionally, they think a global investment environment characterised by elevated uncertainty, widening credit spreads and a positive correlation to a USD negative environment, in their view, favours a weaker GBP. Danske forecast EUR/GBP to move higher towards 0.89 on a 6–12-month horizon.