GBP: Second Leg of Sales Supports Sell-on-Rallies Theme
Jun-12 08:05
- GBP is underperforming through this latest USD bounce, dragging the pair further off the overnight recovery high of 1.3593, as the soft growth data prevents any material test on the $1.3600 handle (which would open markets to gains toward YTD highs) and raises the risk of a sell-on-rallies phase for the pair, characterised by slowing momentum in long positioning, sliding call vol premiums, shakier UK data and sticky BoE pricing around 2 x 25bps rate cuts later this year.
- Yesterday's GBP/USD rally on the US CPI print may firm this view: in contrast with broader G10, the pair failed to top the Tuesday high despite the break lower in the USD Index and the move in the US/UK 2yr yield spread. Any bounce for the greenback could disproportionately impact GBP, with Wednesday's UK inflation print the next flashpoint for activity.
- A technical correction lower would target 1.3504 ahead of layered support between 1.3434-44, marked by a series of historic highs (Sep'24, Apr'25) as well as the 38.2% retracement of the upleg off mid-May low.
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SWAPS: German ASW Curve Twists, Eyes Supply & Broader Risk Backdrop
May-13 08:00
German ASWs vs. 3-month Euribor are +0.5bp to -0.5bp.
- The front end of the curve outperforms, despite the impending Schatz auction, probably owing to a steadier risk backdrop after Monday’s equity rally.
- Weakness in the long end of the outright German bond curve/curve steepening seems to play into moves further out the ASW term structure, the presence of long end supply out from the EU and Netherlands may be a factor here.
CROSS ASSET: Bond futures are extending lows
May-13 07:49
- New intraday lows for Govies on both sides of the Pond, we have some heavy early supply in Europe, and some Desks might also look to position ahead of the US CPI.
- Not much movement in the Dollar on the small move higher in Yields, on the contrary the Dollar is still in the red against most G10s, at least for Today.
- Immediate support in Bund is at 129.28.
- For the TYM5, the 4.50% 10yr Yield level is situated at 109.28.
GILTS: Bear Steepening Early On
May-13 07:39
Bears look to force a clean break through yesterday’s low in gilt futures (91.63), trading as low as 91.56 as participants react to overnight/early London moves in wider core global FI markets.
- Next support located at the Apr 15 low (91.43).
- Yields 0.5-2.5bp higher, curve a touch steeper, curve moves presumably aided by the dovish takeaways from the wage metrics in the monthly labour market report.
- 2s struggle to push meaningfully above 4.00% after the first print above since mid-April. Mid-April highs have also helped cap the move higher in 10s and 30s, for now.
- 2s10s and 5s30s continue to continue to consolidate within their multi-week ranges, 13bp and 10bp below respective cycle closing highs that were lodged in April.
- GBP STIRs drift a little more hawkishly as gilts soften, SONIA futures now flat to -2.0, BoE-dated OIS showing 47bp of cuts through December vs. 49bp ahead of the gilt open.
- Comments from BoE Governor Bailey and hawkish dissenter Pill are due today.
- We will be watching to see if Pill repeats a line from the Agents’ briefing, which noted that if there are external shocks the pace of cuts could be adjusted. However, the setting and topic of the event may mean that Pill doesn’t touch on monetary policy/no headlines are seen (the speech will be at the London School of Economics conference in honour of Sushil Wadhwani).
- Supply-wise, the DMO will sell GBP1bn of the 0.625% Mar-45 linker this morning.
