STIR: SONIA/Euribor Dec '26 Spread Trades To Widest Since BoE Dovish Hold
The SONIA/Euribor December ‘26 spread has widened by 11bp since Friday, registering the highest close seen since the day before the BoE’s dovish hold in early February. 135bp held during yesterday’s move.
- Those that look for more than one BoE rate cut this year may engage in SONIA longs via spread tighteners here.
- A deeper scale of easing was priced into GBP STIRs than their ECB counterpart (~50bp vs. ~10bp late on Friday), which along with the ECB’s “in a good place” mantra, provided scope for greater movement in GBP STIRs in any hawkish adjustment.
- However, relative exposure of electricity prices to the rally in natural gas is also worth noting (given the commodity-centric nature of the hawkish move in the wake of the escalation in the Middle East), with the UK's electricity prices being far more closely tied to the natural gas price relative to Europe.
- We still think that a BoE cut in April is relatively likely, while the presence of additional slack in the UK labour market could help promote further easing latter in ’26 (market prices ~25bp of cumulative cuts for the year at this stage).
- On the Euribor leg, while the bar to an ECB move in either direction is high, it is worth noting that our latest sources piece warned that the ECB would have lower tolerance for any extended energy price shock resulting from the Iran war than in the past. This presents hawkish risks if the energy price move extends and becomes more prolonged.
- The spread last trades at 131.5bp. Cycle closing lows are located at 118.5bp.
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Historical bullets
OPTIONS: Clear of Sizeable Strikes Monday, But Decent Expiries Later This Week
With major pairs fading fast off last week's highs, EUR has quickly edged well back below some of the more sizeable strikes set to roll off at today's cut - possibly leaving markets less anchored into today's ISM Manufacturing print. Beyond today's NY cut, EUR sees solid interest into 1.1850 rolling off tomorrow, Wednesday and Thursday, while AUDUSD currently sits on a sizeable strike at 0.6950 expiring on Wednesday.
Today's expiries:
- EUR/USD: $1.1925(1.2bln), $1.2000(E3.6bln)
- USD/JPY: Y150.95-00($1.5bln), Y152.40-50($705mln), Y155.70($531mln)
- USD/CAD: C$1.3500($838mln)
- USD/CNY: Cny6.8700($1.8bln), Cny6.9700($1.1bln)
This week's highlights:
- EUR/USD: Feb03 $1.1850(E3.4bln), $1.1935-40(E2.4bln); Feb04 $1.1850(E1.2bln); Feb05 $1.1800(E2.1bln), $1.1825-35(E1.5bln)
- USD/JPY: Feb04 Y151.50($1.1bln); Feb05 Y153.00($1.1bln), Y154.00($1.0bln)
- AUD/USD: Feb04 $0.6950(A$1.8bln)
GILTS: Off Highs
Gilts away from session highs after the upward revisions to the final manufacturing PMI flagged in recent bullets.
- Weakness in equities has also started to fade, with precious metals edging away from lows.
- Futures ultimately stick within the range established over the prior couple of sessions, last +17 at 91.02 after topping out at 91.21.
- Yields little changed to 1.5bp lower, curve flatter. 10s still failing to move definitively away from 4.50%.
- GBP STIRs back from dovish session extremes, SONIA last flat to +3.5, BoE-dated OIS pricing ~38.5bp of cuts through November.
UK DATA: Small upward revision to manufacturing PMI
- UK manufacturing PMI sees another upward revision following the upward revisions seen across France, Germany and the Eurozone.
- At first glance not a lot extra from the press release that we didn't know from the flash.
