UK FISCAL: Times report income tax hike in Reeves' plans to OBR: Implications

EURGBP is edging to new daily lows, despite the tightening of the French-German bond yield spread and seeming optimism of PM Lecornu that a budget agreement can be reached in the near-term. This has pressed through the 50-dma of 0.8676, which had successfully provided intraday support on three occasions over the past month.

• The break lower here stems from the reduction in UK borrowing estimates following ONS VAT revisions this morning - adding to the view that the worst may be behind us for the longer-end of the UK Gilt market headed into November's Budget.
• The fade in EURGBP runs counter to the consensus view for further upside in the cross. Despite falling expectations for BoE easing for the rest of this year, most had seen EURGBP as the better expression for fiscal-tripped GBP weakness given US uncertainty and Fed easing, raising focus on any correction toward mid-Sept lows of 0.8633 and 0.8562, the 50% retracement for the May-Jul upleg.
• Meanwhile, EURUSD remains lower, but is comfortably off the daily lows headed into the NY crossover. French politics has aided the moderate bounce in spot, but it's the fade through yesterday's lows in US 10y yield that's the primary driver here - and has contained the mid-week USD rally.

Latest headlines from ECB’s Escriva are broadly consistent with the median Governing Council view (i.e. rates are appropriate at current levels for now, meeting-by-meeting approach with no forward guidance) and his previous comments. 

• He’s previously noted (Sep 16) that “our stance is to remain very agile and well prepared to move in any direction in terms of monetary policy”, so nothing too new in the latest headline around being unable to pre-empt the direction of rates.
• Remarks playing down the appreciation of the Euro as an inflationary risk lean slightly on the hawkish side.
• He notes that US trade disruptions could be inflationary. Full context behind that headline (which in any case with views presented back in March): “Risk on the upside come from fiscal policies, comes from something we have not seen yet but it might materialize maybe with some lags, which is […] the tariffs and trade framework coming from the US. [These could] give rise to a sort of disruption in the supply chain. Sometimes we are focused too much on tariffs but when you examined the agreements -- there are number of nontariff provisions that if they were to materialize in the future might distort trade and this might result in a sort of loss of efficiency at the global level. This is potentially inflationary. This is another factor we need to take into account. By contrast, there are factors that might be to the downside. Diversion of trade from China to Europe [for example]”. 

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