When files get deleted on the source, they are flagged to be purged after the period of time set in the backup plan for keeping deleted files for x days/ weeks/ months.
Incrementals backup new and modified files. The weekly full backs up all files that have outstanding block level incremental versions.
Your full Quickbooks file for example might be 300MB. The daily incremental is probably around 10MB.
When you run the next full, it backs up the entire 300MB.

I changed my original reply*

Where are files deleted from the source stored if the backup chain in which they were originally stored is itself deleted in accordance with the schedule? Will they move to a new chain?

First of all, are you using the new backup format or the legacy format?
The hardest thing to do is to wrap your head around what “incremental forever” means.
In the legacy format, you take an initial full backup. That captures every file that is on source storage (that you included in the backup set)
After that the ONLY things that get backed up are newly added files and modifications to existing files.
Files that never change ( think .pdf files) are never backed up again. They stay forever or until someone deletes them. If someone deletes a file, it will be kept in backup storage for as long as you set in the “ keep files deleted on source for xx days”. A “ Full” in the legacy format is simply a reupload of the files that had block level incrementals captured after the previous full plus any new files added since the last incremental. These “ fulls” are only slightly larger than the incrementals.
The New Backup format is much more in line with traditional tape backups. You do a full backup of everything - run some incrementals, then do another full backup of everything, even the files that have not been ( and never will be) modified.
Until very recently you had to do a full backup at least once per month, meaning that if you have a 90 day version retention period you would have three complete backup sets in storage at any given time (
(actually four but that is beyond this discussion)
The only thing that makes this even remotely viable is that many ( but not all) backend storage providers have a feature called “ in-cloud copying” which allows the creation of synthetic fulls.
A synthetic full takes all of the unchanged blocks of data in the previous full and copies them, behind the scenes, into a new full. This in cloud copying processes at a rate of between 200 GB and 300GB/ hr, or 55 - 83 MBps.
Back to your question, in the new backup format, there is no separate setting for how long to save deleted files, you simply have x number of restore points based on the retention that you set in the plan. The setting applies to versions of files and deleted files.
The latest feature Forever Full Incrementals (FFI), eliminates the 3x-4x storage consumption problem by keeping only one full followed by x numer of incrementals based on your retention setting.
So if you have 30 day retention, on day 31, a new full will be created using the synthetic full process plus the oldest incremental. This process will happen every day going forward. You end up with a “rolling 30 days” of backup/ restore points.
The only issue I see with this is that for very large backup sets, and/ or companies with very slow uplink speeds, the synthetic full might take longer than the hours available overnight. Not that this is a huge issue, but I have asked MSP360 to consider adding a feature that would allow us to specify when the synthetic full should run, perhaps once per week on weekends.
And that is the short explanation.
Hope it helps.