GBP/USD + GBP/EUR Market Update

GBP/USD Extends Post-GDP Advance to 1.3564 as Hawkish MPC Minority and ECB Hike Pricing Sustain Non-Dollar Bid; EUR/USD Firms Above 1.1600, Monday, 17 August 2026

GBP/USD: 1.3564 | GBP/EUR: 1.1687 | EUR/USD: 1.1606

All three pairs open Monday's London session with a constructive bias for non-dollar currencies, building on Friday's GDP-driven close. GBP/USD rose to 1.3525 on 14 August, up 0.38% on the session, and our database shows a further extension to 1.3564 this morning, consistent with a trend higher from a recent low of 1.3165 on 24 June, with the pair now trading above its 50-day and 100-day moving averages. The week's primary domestic risk events, Tuesday's labour market data and Wednesday's CPI, will either validate or challenge the MPC's current "wait and see" posture ahead of the 17 September decision.

Overnight and Market Tone:

The pound traded in a narrow range overnight as the continued absence of fresh UK economic data left investors with little incentive to alter their positions. Risk sentiment is broadly stable: geopolitical uncertainty in the Middle East persists but has not materially escalated since Friday's close, and the benchmark 10-year gilt yield remains in the vicinity of 4.9%, consistent with the market's current pricing of a live but not certain MPC hike at the September meeting. The US dollar is expected to remain supported but less dominant through August, and with no tier-one US data today, the overnight session has seen the dollar drift modestly lower, allowing GBP/USD and EUR/USD to consolidate at the upper end of last week's ranges. FTSE 100 futures point to a flat-to-slightly-firmer open, reflecting the constructive global risk backdrop.

UK Data and Bank of England:

At its meeting ending on 29 July 2026, the MPC voted by a majority of 6-3 to maintain Bank Rate at 3.75%, with three members voting to increase Bank Rate by 0.25 percentage points, to 4%. The three dissenters, Megan Greene, Catherine Mann and Huw Pill, each preferred a 0.25-point rise to 4.00%; that is one more hawkish dissent than June's 7-2 and two more than April's 8-1, with the minority pushing for higher rates having grown at three meetings running. Governor Andrew Bailey did not signal that an increase was imminent, and in the press conference Bailey reiterated that disinflation is continuing, household demand is weak, and businesses' pricing power is limited; the Committee is not seeing clear signs of second-round effects, though it views inflation risks as still on the upside, and pushed back against the idea that the BoE is edging towards tighter policy.

On 30 July, the Bank's central projection showed CPI inflation peaking at around 3.2% in 2026 Q4, with the MPC noting that risks to the inflation outlook are tilted to the upside. The most recent ONS reading showed CPI at 2.6% in the 12 months to June 2026, but most economists still expect inflation to rise again in the second half of the year as higher energy prices are forecast to hit households. This week's domestic calendar is therefore pivotal: the ONS releases employment and earnings data on Tuesday 18 August, and CPI data on Wednesday 19 August. The next scheduled Bank of England rate decision is on 17 September 2026, with OIS markets currently pricing a move of approximately +6 basis points at that meeting, implying roughly a one-in-four probability of a 25bp hike. A CPI print above the Bank's own near-term projection would likely shift that pricing materially higher and provide fresh support to GBP.

European Backdrop and EUR/USD:

The ECB's rate path remains the dominant structural driver for EUR/USD. The ECB raised its deposit rate 25bp to 2.25% on 11 June, its first hike since 2023, while the Fed held at 3.50-3.75% on 17 June. The ECB voted at its July meeting to leave its main interest rate unchanged at 2.25%, but traders are already anticipating a rate hike in September, as ECB President Christine Lagarde warned that renewed Middle East hostilities and the resultant rebound in oil prices pose upside risk to the eurozone inflation outlook. According to a Reuters poll, 57 of 69 economists expect the ECB to hike its deposit rate by 25 basis points to 2.50% in September; 55 of 69 see the deposit rate at 2.50% at end-2026.

ECB policymakers agreed after June's first hike to avoid providing guidance on the future path of interest rates, citing elevated economic uncertainty; officials stressed that communication should remain neutral, neither signalling a series of further hikes nor suggesting the move was a one-off, and reaffirmed a data-dependent, meeting-by-meeting approach. Analysts at HSBC highlight a growing divergence in the global policy outlook, noting that although they expect the ECB to deliver another rate rise in September, for other major central banks it is a much tougher balancing act, underscoring the challenge facing policymakers outside the eurozone as they weigh inflation risks against the need to keep policy on hold.

For EUR/USD specifically, the pair has broken above 1.1600 this morning, a level it last tested in early August. The Fed-ECB rate differential has narrowed dramatically, from 3.25 percentage points in 2023 to 1.50 percentage points today, as the ECB's June 2026 hike to 2.25% compressed the gap further. A September ECB hike to 2.50% would narrow the differential to 1.25 percentage points (assuming the Fed holds), providing a further structural tailwind for the euro. Traders pricing out the possibility of a Fed rate hike in September is also dragging on the dollar, reinforcing the directional bias. The key downside risk for EUR/USD remains any escalation in Middle East tensions that revives safe-haven dollar demand or pushes energy prices sharply higher, which would simultaneously complicate the ECB's September calculus.

US Backdrop:

The Federal Reserve left the federal funds rate unchanged at 3.50%-3.75% for a fifth consecutive meeting in July 2026, in line with expectations, despite markets assigning roughly a one-in-three probability to a rate hike; notably, three FOMC members dissented, preferring to raise rates. Fed Chair Kevin Warsh dropped forward guidance entirely in his press conference, leaving the September FOMC path genuinely open-ended and reducing the dollar's ability to draw directional support from rate expectations alone. The dollar could outperform if US employment or inflation exceeds expectations, Treasury yields rise, or Middle East tensions intensify; today's US calendar is light, with no tier-one releases scheduled, leaving the dollar subject to positioning flows and any geopolitical headlines.

Technical Picture:

GBP/USD: Resistance at 1.3580 (intraday high), then 1.3620 (mid-July peak). Support at 1.3513 (Friday's close), 1.3480, and 1.3430.
GBP/EUR: Resistance at 1.1710 (last week's high), then 1.1750 (year-to-date high). Support at 1.1650, then 1.1610.
EUR/USD: Resistance at 1.1620 (August high), then 1.1680 (July peak). Support at 1.1560 (last week's base), 1.1516 (prior resistance-turned-support).
Outlook: All three pairs retain a constructive non-dollar bias while GBP/USD holds above 1.3480 and EUR/USD above 1.1560; the primary risk to this view is a materially hotter-than-expected UK CPI on Wednesday, which could briefly lift GBP/EUR toward 1.1750 while simultaneously supporting EUR/USD if it reinforces the global central bank tightening narrative.

Today's Calendar:

Today's session is a positioning day; with no tier-one UK or eurozone releases, the week's directional signal will come from Tuesday's ONS labour market print and, above all, Wednesday's July CPI, which arrives one month before the 17 September MPC decision and will be the single most consequential domestic data point of the month for GBP.

Outlook:

The bias for GBP/USD and EUR/USD remains constructive into mid-week, with the MPC's growing hawkish minority and near-consensus ECB September hike expectations providing structural support against a dollar that is directionally rudderless in the absence of fresh Fed guidance. The key risk scenario is a UK CPI print on Wednesday that materially undershoots the Bank's own Q3 projection of "a little under 3%," which would reduce the probability of a September MPC hike, weigh on GBP/USD and GBP/EUR, and potentially push EUR/USD to fresh August highs as the relative ECB-BoE policy divergence reasserts itself.

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.