GBP/USD + GBP/EUR Market Update

GBP/USD Edges Higher as UK Manufacturing PMI Beats, EUR/USD Steadies Ahead of Eurostat Flash HICP, and Gilt Yields Rebound to 4.85% on Renewed Iran Tensions, Tuesday, 02 June 2026

GBP/USD: 1.3479 | GBP/EUR: 1.1571 | EUR/USD: 1.1649

UK 10-year gilt yields rose to 4.85% at the start of June, rebounding from over one-month lows at the end of May, as oil prices surged amid escalating US-Iran tensions. Against that backdrop, GBP/USD has recovered from Monday's intraday dip toward 1.3454 to trade at 1.3479 this morning, while EUR/USD sits at 1.1649, marginally below Friday's 1.1657 close, as markets await the Eurostat flash HICP print and Governor Bailey's scheduled remarks.

Overnight & Market Tone:

The pound edged higher to around $1.346 in the first June trading session, recovering slightly after a monthly drop of over 1% against the USD, with investors closely watching Middle East developments where US-Iran negotiations to extend the ceasefire and reopen the Strait of Hormuz show uncertain progress. Both nations continued exchanging strikes, with Iran claiming it targeted a US airbase, while over the weekend they exchanged proposals to revise a draft deal aimed at extending the ceasefire and reopening the Strait of Hormuz, though progress remained uncertain. The FTSE 100 commenced June trading in modestly negative territory, quoted around 10,409, a fractional retreat of 0.16% from the prior session's close, as the market digested domestic economic data, global energy price movements, and evolving US monetary policy expectations. Brent crude is trading near $93 per barrel (Investing.com), keeping the stagflationary backdrop live for all three pairs. The VIX sits at approximately 15.3, indicating contained but watchful risk sentiment.

UK Data & Bank of England:

The S&P Global UK Manufacturing PMI rose to 53.9 in May 2026 compared with initial estimates and April's 53.7, marking the strongest expansion since May 2022, with output growing at a three-month high, led by intermediate and investment goods, while new orders rose for a sixth straight month on stronger domestic and export demand. However, momentum showed signs of fragility as firms reported front-loading of orders amid concerns over future price rises and supply disruptions, with supply chains remaining under pressure and vendor delivery times lengthening sharply due to shipping delays and geopolitical tensions affecting key routes. Input cost inflation climbed to a near four-year high, driven by higher energy, metals, and chemicals alongside tariffs, taxes, and labour costs, with selling prices rising at the quickest rate since mid-2022. On the monetary policy front, the MPC voted by a majority of 8-1 to maintain Bank Rate at 3.75% at its April meeting, with one member voting to increase Bank Rate by 0.25 percentage points to 4%. The Bank projected CPI at 3.1% in Q2, 3.3% in Q3 and rising somewhat further in Q4, and said it "stands ready to act as necessary" to keep inflation on track for the 2% medium-term target, with the next MPC announcement due 18 June. At the start of 2026, markets had expected the Bank to cut rates twice this year to 3.25%; since the Iran war began, the situation has reversed, and a rise of 0.25 percentage points to 4% before December is now forecast. OIS pricing implies markets are fully pricing the first hike by September, with around two increases in total by year-end (Trading Economics). Market participants are watching for Governor Andrew Bailey's speech today, during which the pound typically faces a significant spike in volatility, particularly if there are any indications regarding monetary policy tightening or easing; Bailey is likely to address the Bank's interest rate stance and discuss the UK economy's health against the backdrop of high energy prices and inflation.

European Backdrop & EUR/USD:

The Eurostat flash estimate of euro area inflation for May 2026 is scheduled for release today; in April, the euro area annual inflation rate was 3.0%, up from 2.6% in March. In April, services contributed the most to the annual rate (+1.38 percentage points), followed by energy (+0.99pp) and food, alcohol and tobacco (+0.46pp). The May flash reading is the single most consequential data point of the week for EUR/USD: a print at or above 3.0% would cement the case for a June ECB hike, while any softening could give the Governing Council pause. Elevated euro-area inflation, which reached 3.0% in April amid surging energy prices tied to Middle East tensions, underpins the approximately 91% market-implied probability for a 25bp ECB deposit facility rate hike at the 11 June meeting; following the April 30 hold at 2.00%, hawkish signals from officials and economist surveys anticipating sequential tightening have reinforced trader consensus. Investors expect the ECB to raise its key rates by 25 basis points on 11 June, with at least one additional hike priced in by the end of the year. The Eurozone composite PMI backdrop is, however, deteriorating: the S&P Global Eurozone Composite PMI fell to 47.5 in May from 48.8, firmly below expectations, reflecting the sharpest pace of decline in private-sector activity since October 2023, with activity weighed by a collapse in services (46.4 vs 47.6 in April), the fastest contraction in over five years. The Eurozone Manufacturing PMI also fell to 51.6 in May from April's near four-year high of 52.2, with growth faltering under the strain of soaring prices and supply chain disruptions tied to the Middle East conflict. This stagflationary mix, rising prices alongside contracting services activity, is the defining tension for EUR/USD. The pair is currently at 1.1649, with technical analysis suggesting the euro has pierced support at 1.1633-1.1611 and may slide toward support at 1.1525-1.1492 if today's HICP disappoints. Conversely, a hot print would likely push EUR/USD back above 1.1700, compressing GBP/EUR as the ECB-BoE rate differential narrows. The ECB's Governing Council has noted that upside risks to inflation and downside risks to growth have intensified, and that the war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment. For treasurers with direct EUR/USD exposures, the pair's near-term direction is almost entirely hostage to today's HICP print and the 11 June Governing Council decision.

US Backdrop:

The Federal Reserve's 8-4 split at its most recent meeting was the most divided FOMC vote since 1992, with three regional presidents already pushing back against any further easing. The US Dollar Index is trading near 99.0, broadly range-bound, with the 10-year UST yield at approximately 4.47% (Investing.com). Monday's calendar included a speech by former Fed Chair Jerome Powell alongside the US ISM Manufacturing PMI, the results of which will feed into USD positioning today; any reading above 50 would support the dollar and weigh on both GBP/USD and EUR/USD. The key US event this week remains Friday's Non-Farm Payrolls, which will shape FOMC rate-path expectations into the 18 June meeting.

Technical Picture:

GBP/USD: Resistance at 1.3500, then 1.3540. Support at 1.3454 (Monday's low), then 1.3400.
GBP/EUR: Resistance at 1.1600, then 1.1640. Support at 1.1535 (recent range floor), then 1.1490.
EUR/USD: Resistance at 1.1700, then 1.1750. Support at 1.1611 (LiteFinance technical support), then 1.1492.
Outlook: EUR/USD has pierced the 1.1633-1.1611 support zone and a confirmed break below 1.1611 on a hot HICP print paradoxically risks a sell-the-fact reaction, while GBP/USD needs a clean break above 1.3500 to signal a resumption of the uptrend from the May lows; GBP/EUR remains range-bound between 1.1535 and 1.1600 pending the relative central bank signals from the 11 June ECB and 18 June MPC.

Today's Calendar:

The Eurostat flash HICP is the day's load-bearing release: a print at or above 3.1% would likely lock in the 11 June ECB hike and drive EUR/USD and GBP/EUR volatility, while Bailey's tone on the BoE's reaction function will set the near-term GBP/USD and GBP/EUR bias.

Outlook:

The structural theme for all three pairs remains the same: a Middle East energy shock that is simultaneously pushing inflation higher and growth lower, forcing the ECB and BoE to signal tightening even as their domestic economies weaken. UK political uncertainty persists, with Starmer facing potential leadership challenges, and bond markets remain on edge as investors consider whether a new Prime Minister would loosen self-imposed fiscal rules limiting borrowing and spending. Treasurers with USD payables should note that GBP/USD faces a binary outcome around today's HICP and Bailey's remarks: a hawkish combination (hot CPI, hawkish Bailey) could push the pair toward 1.3540, while a dovish surprise risks a retest of 1.3400; EUR/USD exposures should be hedged or reviewed ahead of the 11 June ECB, where the rate decision will be the most consequential catalyst for the pair since the onset of the Iran conflict.

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions. Vantry Capital Ltd is authorised and regulated by the Financial Conduct Authority.