CONSUMER STAPLES: Elo/Auchan; S&P downgrade

• Currency market volatility was relatively subdued on Tuesday, in contrast with the sharp swings seen throughout Monday’s session. However, the USD index spent the majority of the session on the backfoot, consistently edging lower and extending session declines from the overnight highs to around 1%.
• Despite the significant greenback surge to start the week, the DXY is now lower on the week with multiple factors weighing throughout the session. Primarily, broader optimism surrounding trade/tariff negotiations has boosted equities, supporting risk sensitive currencies in tandem. Secondly, Trump's hardline approach on Iran has assisted the push lower in the front-end of the US yield curve and, in turn, has pressured the greenback.
• Aside from Scandies which lead G10 FX gains, the Canadian dollar and the Swiss Franc also moderately outperform. Broad dollar weakness however keeps the likes of EUR, AUD and CNH all on the front foot, registering  gains of around 0.3% on the session.
• For now, EURUSD gains are considered corrective, however the powerful recovery from yesterday’s cycle lows has seen the pair breach initial resistance at 1.0350, the Jan 31 low and Monday’s high. A stronger recovery would place the focus on 1.0446, the 50-day EMA and then 1.0533, the Jan 27 high and a key resistance.
• There was also a notable turnaround for USDJPY, which after printing a 155.52 high, traded as low as 154.26, keeping a developing bear threat for the pair in play and focus on a cluster of daily lows just below the 154.00 handle.
• New Zealand unemployment headlines the APAC docket on Wednesday, before the focus turns to US ADP employment and ISM Services PMI. 

European yields rose modestly Tuesday, with Bunds slightly outperforming Gilts.

• After some initial risk-on pressure stemming from the US's delay imposing tariffs on Canada and Mexico, core EGBs/Gilts saw an afternoon bid as US job openings data were weaker than expected.
• MNI published a sources story noting that the ECB is likely to adjust its reference to policy restrictiveness in its next statement in March, but there would be resistance on the Governing Council to completely removing it (link). And on the US tariffs front, MNI reported that while the EU is likely to seek to deescalate any trade dispute with the U.S. via negotiation, it may also look to increase non-tariff barriers (link).
• Limited data included French budget balance (2024 deficit slightly smaller than foreseen in November's draft finance bill); Spain saw a smaller rise in January unemployment than expected.
• The German curve lightly bear flattened, with the UK's bear steepening.
• Periphery EGB spreads tightened marginally, led by BTPs. French OAT spreads were flat ahead of Wednesday's censure votes on the Bayrou government.
• Wednesday's schedule includes final Services/Composite PMIs (including the first and final readings for Italy and Spain) and Eurozone PPI, while ECB's Lane makes an appearance. Attention turns to the Bank of England decision Thursday - MNI's preview is here (PDF).

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 1.7bps at 2.051%, 5-Yr is up 1.5bps at 2.17%, 10-Yr is up 1.1bps at 2.396%, and 30-Yr is up 0.7bps at 2.646%.
• UK: The 2-Yr yield is up 1.6bps at 4.181%, 5-Yr is up 2.7bps at 4.188%, 10-Yr is up 3.5bps at 4.522%, and 30-Yr is up 3.5bps at 5.125%.
• Italian BTP spread down 1.7bps at 110bps / French OAT down 0.2bps at 72bps  
   

• It would be a huge surprise to the market if this week’s MPC meeting delivered anything other than a 25bp cut to bring Bank Rate to 4.50%.
• The bar is also high for forward guidance to be meaningfully tweaked. We would be surprised if the vote split wasn’t 8-1 (also the base case for 18/22 sellside previews we read), although there are risks around the vote, particularly from the Agents’ Pay Survey.
• The Agents'; Pay Survey is the single measure with the most potential to cause surprises overall, both this week (to MPR projections, the vote split etc) and to future policy.
• We look at how data has evolved, expectations for the MPR projections as well as summarising over 20 sellside views.

FOR THE FULL PUBLICATION PLEASE USE THE FOLLOWING LINK: MNI BoE Preview - Feb25.pdf