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The British Pound extends its late-July slide, although the pace of declines has eased.
With little domestic news to latch onto for now, global macroeconomic drivers are determining Sterling's direction.
The proximate driver is a dramatic reversal in energy markets.
"Oil prices extended their slide as hopes rose for a renewed US-Iran peace process," says Daniel Richards, an analyst at Emirates NBD.
Brent crude fell 8.7% yesterday and is down a further 1.3% this morning at $87.2 per barrel, having traded above $100 at Thursday's close.
President Donald Trump said the two sides were in diplomatic talks and that "there's a good chance that something could happen."
Falling oil is disinflationary, and UK bonds have responded in kind: gilts rallied, with the ten-year yield falling back below 5.0% as markets price a more benign global inflationary pulse.
Here lies the catch for Sterling: the Pound's July advance was built on UK yields rising faster than peers, so any pullback in the UK's gilt yield premium works in reverse and can weigh on the currency.
The Pound-to-Euro exchange rate extends a ten-day slide, falling below 1.17 for the first time this month, taking it into the 1.1670-1.1700 support area we identified in the week ahead forecast.
The Pound-to-Dollar rate has meanwhile slipped below interim support at 1.3303.
Sentiment Sours
US equities are on the slide, underscoring that despite Middle East tensions easing, other forces are at work.
The AI trade unwind is still underway, with falls in Asia particularly acute, while nervousness that the Federal Reserve will raise interest rates is also apparent.
To the extent that Pound-Euro and Pound-Dollar are risk-sensitive exchange rates, both are liable to feel pressure while stocks are heavy.
All Eyes on the Fed
Wednesday's Federal Reserve decision is therefore the pivotal event for near-term market action.
Market pricing assigns slightly more than a one-in-three chance of a hike this week and nearly three-in-four for September, with combined pricing implying at least one hike over the next two months.
"We judge the risk of a surprise interest rate hike to be much higher for the Fed than the BoE. A surprise hike from the Fed would weigh heavily on GBP/USD," says Samara Hamoud, analyst at Commonwealth Bank.
With the Fed providing less forward guidance and Chair Warsh deliberately refraining from signalling a specific policy path, market participants have been left to form their own expectations.
We expect no change in monetary policy this week, but Commonwealth Bank join those expecting one or two voters to dissent in favour of a 25 basis point interest rate hike.
CIBC Capital Markets goes further on the dissent count.
"We expect that Hammack, Logan, and Waller will vote for a hike," says Noah Buffam, strategist at CIBC Capital Markets.
"Waller's guidance and goalposts have continued to shift hawkish in recent months even if the initial targets had been met (medium/long term inflation expectations remaining anchored, June CPI below 0.3%). Thus, we expect that the rally in energy prices is enough to have them voting for a hike, even if his threshold on CPI was met."
Three dissents would read as hawkish and extend the Dollar's advantage; a unanimous hold with soothing language is the outcome that gives the oversold Pound room to breathe.
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