EQUITIES: Cash Estoxx and Futures are still rallying to fresh record levels

• RES 4: 1.3753 High High Jul 2   
• RES 3: 1.3681 High Jul 4 
• RES 2: 1.3636 76.4% retracement of the Jul 1 - Aug1 downleg
• RES 1: 1.3550/3595 High Sep 1 / High Aug 14
• PRICE: 1.3439 @ 08:44 BST Sep 2
• SUP 1: 1.3376 Intraday low  
• SUP 2: 1.3315 61.8% retracement of the Aug 1 - 14 bull leg
• SUP 3: 1.3249 76.4% retracement of the Aug 1 - 14 bull leg 
• SUP 4: 1.3142 Low Aug 1 and a key support      

The outlook in GBPUSD remains bullish and recent gains reinforce this theme. However, today’s sell-off undermines the bull theme and attention is on key short-term support at 1.3391, the Aug 22 low. It has been pierced, a  break of this level would signal scope for a deeper retracement and expose 1.3315, a Fibonacci retracement. For bulls, a breach of 1.3595, the Aug 14 high, is required to signal scope for a strong rally.

Eurozone August HICP came in at 2.05% Y/Y, 5 hundredths below rounded initial consensus of 2.1% Y/Y and marginally higher than we would have expected the print following national-level data released over the last couple of days (vs 2.04% prior). The marginal downside surprise vs consensus on headline was energy-driven: the category printed -1.89% Y/Y (-1.6% MNI median, -2.39% prior) while core inflation was slightly higher than expected at 2.27% (2.2% consensus, 2.31% prior) driven by NEIG.

• This fact limits the likely feedthrough to ECB rate expectations further, which would already have been limited as a more notable downward surprise would have likely been needed for any potential dovish tilt.
• Much eyed services inflation meanwhile printed 3.10% Y/Y (3.1% MNI median, 3.15% prior), continuing its downward trajectory seen in recent months.
• FAT (food/alcohol/tobacco) also came in broadly in line with expectations, at 3.21% (3.2% MNI median, 3.25% prior). The category trended upwards this year but that trend has not continued at least in August.

• Following generally steady Asia-Pac trade, markets underwent a sharp dose of risk-off alongside the European open as a sustained shoot higher in longer-end yields unsettled sentiment across equities, currencies and bond markets. The mix this morning of: political uncertainty in Japan (various resignations across the LDP), a window-dressing UK reshuffle (not expected to resolve Starmer's popularity crisis in the near-term) and acute pressure on the longer-end of the UK, US and European yield curves - has reignited fiscal, financing and politic risk concerns around higher borrowing costs - driving sentiment through the European open.
• Sizeable down-move in GBP/USD comes despite the bullish technical backdrop that stemmed from the bullish engulfing candle posted on August 22nd. With spot showing through the lows already today, this somewhat undermines the recovery off 1.3391 and instead retracement support expected into 1.3315 and 1.3369 is of more importance.
• Gains for the USD Index put the currency on for a strong start to September. The daily candle chart has the USD Index on course to form downtrendline resistance drawn off the early August high at today's 98.389 print.
• Today's price action serves as a further reminder of the pressure on governments from bond markets, particularly as Summer concludes. Today's Gilt price action shows markets are not satisfied with floated proposals so far for the UK Treasury to raise indirect taxes through property, capital gains, landlords, or otherwise. Given the internal party opposition to spending cuts, this places additional pressure on the Chancellor's pledge not to raise VAT, income tax or national insurance this parliament - a topic that will likely be a market focus into the Autumn Budget - and may have to become a more palatable option the longer yields stay higher.
• Focus for the duration of Tuesday trade remains on the volatility in the longer-end of the curve, as well as the ISM manufacturing print for August. The release will be watched carefully for clues or signals headed into this Friday's highly consequential NFP print.