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The British pound endures a soft short-term tone, but the broader setup remains relatively constructive.
The currency has endured three days of successive losses against both the euro and dollar with cross-currency movements proving dominant in a week that's devoid of domestic UK data releases.
The dollar is therefore in command and we saw a decent recovery in the midweek session that forced a slide of 0.38% in the pound-to-dollar conversion.
Compare that to a lesser 0.18% fall in the euro-dollar conversion and we can immediately see the euro withstood the dollar's advance better than pound sterling did.
The obvious cross-currency implication of that euro resilience was a softer pound-to-euro cross (GBP/EUR), which fell by nearly a quarter of a percent to 1.1661.
The fall is consistent with a near-term run of weakness for GBP/EUR that could extend to 1.1647 ahead of the weekend, which is the location of the near-term floor.
Driving dollar resilience was a firmer U.S. PCE data docket, which reinforced Federal Reserve rate hike expectations.
Headline PCE inflation - which the Fed officially targets with interest rate policy - rose by 0.2% m/m and 3.7% y/y, above estimates of 0.1% and 3.6%, respectively.
Core PCE inflation rose by 0.2% m/m and 3.3 y/y, in line with expectations, placing it well above the Fed's target of 2.0%.
"We continue to expect the first 25bp Fed interest rate hike in December which is currently fully priced. We expect two or possible three more follow‑up hikes in 2027," says Carol Kong, FX strategist at Commonwealth Bank. "By contrast, markets are pricing about a 70% chance of an additional hike."
The data contributes to the firm global fixed income backdrop, helping to prop up both short- and long-dated tenors of U.S. bonds.
UK bond yields are understandably supported as a result, given the global picture is currently holding sway over sterling assets.
And although the near-term looks to be a case of expecting some more GBP weakness, there's reason to expect dips to be shallow.
British bonds continue to yield above most developed market peers, and in a world where 'carry' remains popular amongst global investors, that counts in the pound's favour.
That's because investors like to invest in low interest rates (or where bond yields are low) and invest where the return is higher.
That's providing a consistent theme of support for GBP on longer-term considerations.
Near-term, the next test is Friday's Jackson Hole appearance of the Federal Reserve's Governor Kevin Warsh.
Any comments that reinforce bets for future rate hikes would likely play into the dollar's hand, and given the cross-currency action we've seen so far this week, that would pose a damp end to the week for the pound.
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