Sterling has extended yesterday’s gains scored in response to the slightly higher than expected August CPI.  It is trading at its best levels since last September. Chancellor Hammond’s suggest that the UK will seek a transition period that is essentially an extension of the status quo fans hopes of a softer Brexit and this is also seen as supportive for sterling.  

The August employment data is awaited. The main issue here is not job growth per se. As has been the case in the US and Japan too, job creation in the UK appears fairly healthy. The problem is the limited wage growth. This is arguably a more acute issue in the UK because of the rise in inflation, which saps the purchasing power of households. The Bank of England’s Monetary Policy Committee meets tomorrow.  At full force, now that a new Deputy has been named, a 7-2 vote is expected in favor of standing pat.  

We have been identifying the $1.3430 area is a reasonable technical target for Sterling. It represents the 50% retracement of sterling’s losses since the day of the referendum June 2016 when it briefly traded $1.50. Also helping Sterling is the unwinding of short cross positions against the euro. The prospects that the ECB tapering, which some participants had seen as urgent due to the self-imposed rule on the asset purchases, now appears to be a more prolonged process that could persist well into 2018, may have encouraged some profit-taking.  

The euro poked through GBP0.9300 in late August amid calls from many investment houses for a move to parity. At the peak, it had moved beyond its upper Bollinger Band (two standard deviations above the 20-day moving average). In the first part of September, the euro has pulled back 3.5% against sterling and is now moving below its lower Bollinger Band.  The low for the cross this year was reached before the French elections in April near GBP0.8315. The GBP0.8930 area represents a 38.2% retracement of the four-month rally. In addition to the violation of the lower Bollinger Band, the slow Stochastics are showing preliminary signs of a bullish divergence for the euro.