EUROPEAN FIXED UPDATE: Fading from overnight modest tariff-induced gains, hawkish Schnabel added to the pullback

USTs: -6 ticks, 111-01

• Lifted to 111-08 peak overnight when Trump announced that remaining nations (seemingly those that don’t get a letter) will have a 20% or 15% tariff level imposed on them (reminder, the current baseline is 10%). This, alongside Trump releasing a letter charging Canada a 35% tariff sparked a broad risk-off move and propped up havens, including fixed.


• However, the move was only a handful of ticks and leaves USTs shy of Monday’s 111-12+ best and the WTD high at 111-13+. Since, USTs have gradually faded the whole move and are at a 110-31 trough, lower by just under 10 ticks at most. Pressure potentially a function of the TACO-trade remaining in play, optimism that Trump not yet releasing the EU letter means talks are ongoing and the outcome will be more market-friendly than Canada’s (see Bunds for more).


• Irrespective of the driver, the moves remain relatively minimal in magnitude, leaving USTs comfortably in existing 110-21+ to 111-13+ WTD parameters. As it stands, set to end the week lower by around five ticks.


• Ahead, the docket is very light for the US and as such we await any further tariff letters from Trump and/or a response from the likes of Canada on the latest levies.

Bunds: 129.28 ticks, -17

• Initial action was a repeat of the above, Bunds peaked at 129.74 early doors before fading gradually into the morning.


• As above, the market keenly awaits an update on the tariff front after Trump said the EU letter will be published on Friday (time TBC). A letter that will be scrutinised firstly for the rate, and how it compares to Canada, the 10% baseline and new 15% or 20% levels for nations without a letter. Additionally, for any signs of carve outs for sectors highlighted as particularly sensitive such as alcohol, cars and/or aircraft, among others.


• This afternoon, European envoys are already scheduled to hold a meeting while trade ministers are scheduled to meet on Monday. From the European side, Politico highlights that the EU’s appetite for retaliation is fading, while a diplomat who spoke to them on Thursday said they don’t know where they will be by Friday, “whether it will be an agreement in principle or not”.


• Given that talks are ongoing between the EU and the US, it is possible that the Trump letter will be the deal-in-principle the EU has been pushing for (i.e. a temporary one to tide things over while negotiations continue) rather than the ultimatums Trump’s letters have thus far been.


• As mentioned, fixed had been fading gradually throughout the morning, and while there was no immediate reaction to ECB’s Schnabel speaking with Econostream, a marked move lower did occur around 25 minutes after, sending Bunds to a 129.19 WTD low and well into the red, support from mid-May at 128.97.


• In brief, Schnabel unsurprisingly stuck to her hawkish self outlining that the bar to another cut is “very high” and from today’s perspective, “a further rate cut is not appropriate”. Remarks chime with ECB pricing for July (2% implied probability of a cut), but contrast somewhat with pricing by end-2025 with around 19bps implied.


• The crux of Schnabel’s argument is that the ECB is already being and is becoming more accommodative due to bank lending activity and a more resilient than forecast economy. Adding that recent German fiscal measures may have also lifted the natural interest rate.

Gilts: -20 ticks, 91.76

• An echo of the above. Opened at 92.00, lifted a few ticks to a 92.08 peak, which was seemingly an acknowledgement of the overnight move in USTs to highs and reacting to weaker-than-expected UK GDP.


• Since, Gilts have been drifting lower with peers, printing a 91.70 low around the time Bunds hit their trough.


• Given that the UK already has a trade deal we are not directly awaiting an update from Trump. However, Trump’s EU letter will be scrutinised to see what position it places the bloc in vs the UK, i.e. if it provides a comparative advantage for either trade partner.


• Within the UK, attention on a piece in the FT that the Chancellor is said to be looking at reforms to her budget regime in order to avert the possibility of having to come back in the Spring Statement and repair any Autumn Budget fallout. Sources cited suggest the Chancellor is considering IMF recommendations to “reduce pressure for frequent fiscal policy changes”. As such, it appears the Chancellor will be cementing her commitment to just one formal fiscal event per year.

11 Jul 2025 - 09:55- ForexEU Research- Source: Newsquawk