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Pound sterling's retreat from July's highs remains intact, a rising average has held and a corrective bounce looks due.
Last week saw the pound-to-euro exchange rate break beneath the shelf that held it through August in the opening days of September, but the decline then stopped on the rising 100-day moving average.
Losses for sterling come amidst renewed nervousness about global bond markets, where the price of debt plummeted last week and sent the cost of borrowing - the yield paid by said bonds - surging to multi-decade highs. The pound is particularly vulnerable to this as UK debt levels are particularly high and domestic inflation has run unanchored above the Bank of England's 2.0% forecast for a protracted period.
Nevertheless, from a technical perspective, the market might have found its footing on one average while leaving the other well above it, which is the setup that tends to produce a corrective bounce:
Spot at 1.1637 sits just above the 100-day moving average at 1.1626 and some 40 pips beneath the 21-day at 1.1675.
The 100-day has climbed without interruption since June, and last week's decline ran into it for the first time since July before the market closed back above. A rising long-term average that catches a fall is doing precisely the job the GBP's medium-term uptrend against EUR needs of it.
Exchange rates tend to mean-revert to the 21-day when they have run some distance from it, and the pound sits 0.32% beneath its own. I tend to see decent deviations from the 21-day as temporary, and expect the gap to close.
Hence, why I look for a soft 'upweek'.
Soft being the important word here as the 21-day has fallen since the first week of August while the 100-day has risen since June, which leaves 49 pips between them, creating a narrowing gap.
Above sits 1.16476, the shelf that floored August and now works as resistance on the level it lost, with the 21-day at 1.1674 beyond it and 1.1750 above both. Beneath, the 100-day at 1.16259 is the immediate support, then 1.1600, then the rising line drawn from March running through the 1.1585 area.
A week ago we looked for 1.1650 to hold and named a daily close beneath it as what would change our mind and bring the 100-day into view.
The close came and the 100-day duly came into view, which is where the market sits this morning. The sequence we set out has run its course, so the question now is no longer whether the market reaches the bottom of it, but what it does there.
For now we look for a corrective bounce towards 1.1647, and beyond it the 21-day at 1.16745, treating both as resistance inside a decline that has further to run. A daily close beneath the 100-day at 1.16259 would end that reading and put 1.16000 in play.
Step back and the uptrend that began at March's low survives all of this: the rising turquose line drawn from it runs through the 1.1585 area and the 1.16000 horizontal sits just above, so the two converge through September, which makes 1.1600 the level separating this retreat from something more serious.
Britain This Week: GDP in Focus
Chancellor John Healey. Picture by Kirsty O'Connor / HM Treasury.
UK July monthly GDP, Friday 11 September: Expected 0.0% m/m against +0.3% in June, as July's fall in retail sales volumes offsets an improved composite PMI. The BoE's baseline Q3 forecast is 0.1% q/q.
A beat argues the economy can carry the rates already priced and supports gilt yields and Sterling; a miss does the reverse. Analysts at Brown Brothers Harriman are explicit that this is unlikely to shift Bank of England pricing either way, so the honest read is that it takes a material surprise in either direction to move the pound. Treat it as a first-tier release with a second-tier reaction function this month.
The thing that actually drives Sterling this week
With no BoE meeting and a thin domestic calendar, the pound is taking its direction from the gilt market and the fiscal picture, which is the established transmission for this pair.
Barclays estimates rising gilt yields have eroded the Chancellor's headroom from over £23bn at the OBR's March outlook to £10-15bn. BBH put it at around £12bn, describing it as halved.
Chancellor Healey has pledged to build a fiscal buffer against uncertainty at the 28 October Budget, which BBH read as pointing to a mix of tax rises and spending cuts. Barclays' framing is that rising global bond yields risk disrupting what was shaping up as a continuity budget.
The rate-pricing risk. The swaps curve implies 75bp of BoE hikes over the next twelve months, to 4.50%. Brown Brothers Harriman calls that too aggressive and say it leaves GBP vulnerable to a dovish repricing, pointing to the UK's negative output gap, a policy rate already above the midpoint of the Bank's 2% to 4% neutral estimate, and the prospect of tighter fiscal policy.
A fortnight ago that gap was at 50bp, now it's at 75bp.
Second tier, in passing: The Q3 BoE/Ipsos household inflation expectations survey is due Friday alongside GDP, which Barclays flagged as informationally rich given the Citi/YouGov 1-year measure hit 3.9% in August.
Last week's BRC index suggested near-term upside inflation risk while firms' expectations in the DMP were more reassuring on the medium term.
The Bank Consensus, Without the Terminal
The median, mean, highest and lowest from the October survey update, plus named point forecasts out to 2027.
Free information pack, issued by World Wide Currencies.
