EGBS: Supply Contains Upside In Bunds, Bear Cycle Intact

• GBPUSD: As noted, pressures surrounding the fiscal trajectory for the UK are further weighing on sterling this morning, combining with the risk-off sentiment across global markets. This has prompted GBPUSD to extend pullback lows – continuing to erode the post Liberation Day rally in April. Cable trades within 30 pips of 1.3041 (Apr 14 low), of which a break would bolster bearish conditions. 1.2971 would be an interim support on the way to 1.2709, a key medium-term level.
• EURGBP: In the crosses, EURGBP has had a solid bounce from support, broadly respecting the prior breakout point at 0.8769 and initial support at 0.8751, the Sep 25 high. Topside targets for the broader rally include 0.8835 and 0.8875, the April 2023 high.
• GBPJPY: The risk off moves and fresh FX jawboning from the finance minister in Japan have contributed to the sharp 1.1% downswing for GBPJPY (shown below) today. The cross has notably breached the 50-day EMA, and is rapidly approaching the psychological 200 mark, an area that provided pivotal significance in 2024. Furthermore, a move below 200 would coincide with a break of trendline support, drawn from the April lows, which would provide additional bearish impetus for the move. 197.49 is the primary target.
• GBPCHF: Swiss franc weakness in the aftermath of soft inflation data on Monday assisted a moderate GBPCHF recovery, however, initial resistance at the 20-day EMA has been well respected, with a quick return sub-1.06 today. Moving average indicators highlight a dominant downtrend, with the focus remaining on cycle lows at 1.0501. 

• GBP traded softer on the back of another pre-Budget appearance from UK Chancellor Reeves. While not drawn into details on the Budget measures specifically - it was certainly her clearest signal yet that sizeable tax rises are incoming (suggested by the statement of working in the national interest, rather than political popularity), as well as indicating her intention to pave the way with fiscal policy to allow for further BoE rate cuts.
• What does this mean for GBP? GBPUSD has broken to a new pullback low - trading at comparable levels with the Liberation Day rally in April. This makes 1.3041, the Apr 14 low the area of interest ahead of 1.2971, the 1.382 proj of the Sep 17 - 25 - Oct 1 price swing.
• Outside of GBP, risk-off trade pervades after slippage in US equity futures held through overnight trade and remains the dominant theme into the crossover. Palantir is set to drop over 7% at the open as markets caution on extreme valuations and the scale of the recent rally - a move mirrored in South Korea's SK Hynix overnight - a key supplier to Nvidia.
• Resultantly, the best performing currency today is JPY, rallying against all others, will risk proxy currencies slide - namely the NZD. Initial support in USD/JPY comes in at 153.27, followed by 152.06. The technical trend structure in the pair remains bullish at this stage.
• JOLTs, trade balance and durable goods orders data were originally set for release today - but the extension of the government shutdown will keep focus on private sector data and corporate earnings as the best bellwether for the state of the economy. As such, tomorrow's ADP employment change, S&P Global final PMI and ISM services index are of utmost importance. 

Bund futures have found support from this morning’s deterioration of risk sentiment, but underperform Gilts. Today’s price action has allowed Bunds to move back above the 50-day EMA, which was pierced yesterday. For now, the selloff that started on October 17 is still considered corrective.

• Bunds are +18 ticks at 129.30 at typing. Initial resistance is the 20-day EMA at 129.42.
• German yields are 1.5 – 2.5bps lower across the curve. This morning’s Eurozone focus has been on supply, with the EFSF holding a dual tranche syndication, Austria selling 10-year RAGBs (which were well-received) and Germany set to sell E5bln of the 2.00% Dec-27 Schatz at 1030GMT.
• 10-year EGB spreads to Bunds are up to 1.5bps wider owing to the soft risk backdrop. European equity futures are down 1.65%.
• The French core state budget deficit in the year to September narrowed slightly versus August, as would normally be expected but at least an improvement compared to a rare monthly deficit in Sep 2024. The YTD deficit remains smaller than last year, helped by a further increase in revenues, and remains roughly on track to meet 2025 targets. Focus remains on ongoing 2026 budget negotiations.
• Bank of Finland Governor Rehn outlined his intention to run for ECB Vice President. He also maintained that uncertainty about future growth remains high, and that risks are skewed to the downside.