BTP TECHS: (Z5) Corrective Phase Still In Play

• Some notable early flow across EGBs and especially in OATs following S&P's rating downgrade on Friday. The French 10yr gapped lower at the open and would need a push back to 123.17 to close it.
• German PPI came in below expectations, helping the Bund a few ticks higher but price action remains short of the initial resistance of 130.18. Initial support in Bunds is unchanged at 129.13.
• The 2yr part of the curve is leading in early trade as Schatz volumes are already higher relative to the 5yr Bobl.
• There are no tier data releases left for the session today, with UK CPI on Wednesday, prelim PMIs and the US CPI on Friday the main focus on the data front.
  Speakers today include ECB's Schnabel, Nagel & Vujcic. The FOMC have entered their pre-meeting media blackout period. 

• RES 4: 1.4200 Round number resistance  
• RES 3: 1.4167 50.0% retracement of the Feb 3 - Jun 16 bear leg
• RES 2: 1.4111 High Apr 10
• RES 1: 1.4080 High Oct 16 and the bull trigger
• PRICE: 1.4027 @ 08:03 BST Oct 20
• SUP 1: 1.3965/3889 20- and 50-day EMA values  
• SUP 2: 1.3814 Bull channel base drawn from the Jul 23 low 
• SUP 3: 1.3727 Low Aug 29 and a bear trigger 
• SUP 4: 1.3689 Low Jul 28 

A bull cycle in USDCAD remains intact and the pair is trading closer to its recent highs. Moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on 1.4111, the Apr 10 high, and further out, scope is seen for an extension towards 1.4167, a Fibonacci retracement. First key support lies at 1.3889, the 50-day EMA. Support at the 20-day EMA lies at 1.3965. 

Wednesday’ September inflation report is the key event for GBP STIRs this week. With markets still pricing just ~10bps of easing through year-end, there is scope for material dovish repricing on a large downside surprise. Given the MPCs sensitivity to non-core components and their impact on inflation expectations, the most dovish outcome on Wednesday could be a downside surprise driven by food. 

• SONIA futures are flat to +1.0 ticks through the blues. As with Euribor counterparts, recent bull flattening in 1Y SONIA calendar spreads unwound a little on Friday.
• The main fiscal headlines from the weekend have suggested that VAT may be removed from energy bills. This could reduce CPI but about 0.16pp (see earlier post for more colour).
• On Saturday, Governor Bailey said that Brexit was likely to drag on the UK economy for the “foreseeable future”. There weren’t any other near-term monetary policy signals from Bailey. A reminder that on Tuesday he re-iterated his view that the labour market is softening. Bailey remains the key MPC swing voter, in our view, and his comments last week appeared to retain optionality for voting for a Q4 cut.
• While tomorrow’s public sector finance data will be more important for the Gilt market, we wouldn’t rule out spillover into GBP STIRs if the data surprises significantly.
• October Flash PMIs are also due on Friday.