GBP/USD + GBP/EUR Market Update

Oil Surge Caps Sterling's Advance as Iran Deal Expiry Revives Inflation Fears; GBP/USD Holds 1.3530, EUR/USD Slips to 1.1573, Tuesday, 18 August 2026

GBP/USD: 1.3530 | GBP/EUR: 1.1689 | EUR/USD: 1.1573

London stocks are expected to open broadly unchanged on Tuesday, with FTSE 100 futures indicating a marginal decline, after the index suffered its sixth consecutive fall on Monday, weighed by Brent crude surging above $91 a barrel amid elevated Middle East tensions and uncertainty over the Strait of Hormuz. GBP/USD fell to 1.3535 on 18 August, down 0.07% from the previous session, consolidating Monday's advance to 1.3564 as the energy-driven risk-off tone tempers the hawkish MPC narrative; EUR/USD has similarly retreated from its Monday high, with both pairs now awaiting today's ONS labour market data and tomorrow's CPI print for directional impetus.

Overnight & Market Tone:

The FTSE 100 looks set to open broadly flat as Asian shares mostly slipped overnight amid nagging inflation concerns, with Japan's Nikkei 225 leading the retreat, falling 1.6%, while Hong Kong's Hang Seng and the Shanghai Composite shed 0.6% and 0.5% respectively. European markets are expected to fare worse, with Germany's DAX 40 called 0.5% lower and France's CAC 40 down 0.4%. The VIX stands at 15.19, up 6.6% on the session, reflecting the renewed geopolitical unease. Sterling slipped to $1.3537 in early trade, while the 10-year US Treasury yield reached 4.74% and the 30-year yield climbed to 5.32%. The 10-year UST had held around 4.69% on Monday after rising about 5 basis points in the prior session, reflecting concerns that the Federal Reserve may be complacent about inflationary risks amid persistent Middle East tensions. UK 10-year gilt yields are tracking the broader global bond sell-off, with the market sensitive to tomorrow's CPI print as a potential catalyst for further repricing of BoE expectations.

UK Data & Bank of England:

Today's ONS labour market release (07.00am) is the first of two critical domestic data points this week. The UK unemployment rate for people aged 16 and over was estimated at 4.9% in the March-to-May 2026 period, up 0.2 percentage points on the year but down 0.1 percentage points on the quarter. Wages in cash terms rose at a rate of 4.3% including bonuses and 3.4% excluding bonuses in the three months to May, the most recent comparable period. Markets will scrutinise today's August release for any acceleration in the April-to-June wage print, given that year-on-year growth in average pay has continued to slow for pay excluding bonuses, but earnings including bonuses have grown faster due to higher bonus payments this year. Persistent wage growth above 4% remains the primary argument for the hawkish MPC minority. The Bank of England held Bank Rate at 3.75% on 30 July 2026, with the MPC voting 6-3 to hold. The three dissenters, Megan Greene, Catherine Mann, and Huw Pill, each preferred a 0.25-point rise to 4.00%, marking 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 consecutive meetings. The next scheduled BoE 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. The Bank's 30 July 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. Tomorrow's July CPI print (ONS, 07.00am, 19 August) is therefore the week's pivotal release for sterling: a reading above the BoE's near-3% Q3 projection would materially sharpen the case for a September hike and could push OIS pricing toward a 50% probability or beyond.

European Backdrop & EUR/USD:

The ECB raised its deposit facility rate from 2% to 2.25% at its June meeting, its first hike in nearly three years, driven by the inflationary impact of the Iran conflict on energy markets. The ECB left rates unchanged at its July meeting following the June hike, with policymakers since adopting a more cautious "wait-and-see" approach as softer inflation, wage growth, and economic activity have reduced the urgency for another immediate move. Market-based measures of eurozone inflation expectations over the next year remain around 2.4%, above the ECB's 2% target, while eurozone headline inflation edged up to 2.9% in July. The renewed surge in oil prices has again strengthened expectations of further tightening, and a September move is now almost fully priced in by markets. At the July post-meeting press conference, ECB President Lagarde warned that the longer energy prices remain elevated, "the more likely they are to drive up broader inflation through indirect and second-round effects."

For EUR/USD specifically, the pair has retreated from Monday's 1.1600 high to trade around 1.1573 this morning. EUR/USD fell to 1.1573 on 18 August, down 0.06% from the previous session. The pair's recent advance from the 1.1500 area has been underpinned by the compression of the Fed-ECB rate differential in the euro's favour: with the ECB now at 2.25% and markets pricing a further hike to 2.50% in September, while the Fed holds at 3.50-3.75% with a divided committee, the differential is narrowing. However, today's Brent-driven risk-off tone is a near-term headwind for EUR/USD, as higher energy prices simultaneously raise eurozone inflation expectations (euro-positive via ECB pricing) and weigh on eurozone growth prospects (euro-negative via the stagflation channel). The eurozone economy shrank by 0.2% in Q1 2026, prompting economists to warn of a period of stagflation. ECB staff projections foresee headline inflation averaging 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Treasurers with direct EUR/USD exposures should note that the pair is holding above the 1.1550 area that served as support through much of last week; a sustained break below that level would open a retest of the 1.1500 zone. The key upside catalyst for EUR/USD remains confirmation of the September ECB hike, which the market already prices but has not yet received formal guidance on.

US Backdrop:

The Fed held its benchmark rate steady at 3.50-3.75% at the July 28-29 FOMC meeting, Kevin Warsh's second as chair, though the central bank hinted at a potential rate hike at its next September meeting. Despite increasing support for a rate increase, the FOMC voted 9-3 to hold, with three members dissenting in favour of an immediate hike. Warsh is expected to speak at the Jackson Hole Economic Policy Symposium on 27-29 August in Wyoming, and his speech will be closely watched for signals on how the Fed's monetary policy approach may evolve. The July FOMC minutes are due for release today (Wednesday 20.00 BST), and any language reinforcing the hawkish minority's concerns about persistent inflation could push the dollar higher and weigh on both GBP/USD and EUR/USD into the European close. The interim ceasefire agreement between the US and Iran formally expired on Monday, and University of Michigan year-ahead inflation expectations rose in August, marking a fifth consecutive month above the 4% level, keeping the Fed's September calculus finely balanced.

Technical Picture:

GBP/USD: Resistance at 1.3556 (today's early high/Monday's session high area), then 1.3564 (Monday's post-GDP peak, the multi-week high). Support at 1.3510 (Friday's close area), then 1.3480 (last week's mid-range pivot).
GBP/EUR: Resistance at 1.1700 (psychological level, tested intraday last week), then 1.1710 (August range high). Support at 1.1670 (Monday's low area), then 1.1650 (mid-August floor).
EUR/USD: Resistance at 1.1600 (Monday's intraday high, now a near-term pivot), then 1.1620 (early August range top). Support at 1.1550 (last week's base), then 1.1516 (prior resistance-turned-support from late July).
Outlook: All three pairs are in a consolidation phase after last week's directional moves, with the oil-driven risk-off tone capping upside for non-dollar currencies in the near term; the balance of technical risk is modestly to the downside for GBP/USD and EUR/USD unless today's labour data or tomorrow's CPI deliver a hawkish surprise.

Today's Calendar:

The 07.00am ONS labour market release is the most immediate sterling risk today, with the wages print the key variable for MPC September pricing; the FOMC minutes at 20.00pm carry significant USD event risk into the London close and beyond.

Outlook:

The near-term bias for GBP/USD and EUR/USD is cautiously constructive on the fundamental picture (hawkish BoE minority, near-certain ECB September hike, structurally soft dollar) but tactically capped by the oil-driven risk-off tone and the uncertainty ahead of today's FOMC minutes and tomorrow's UK CPI. Treasurers with USD receivables may find the current 1.3530 area a reasonable level to layer in partial hedges ahead of what could be a volatile 48 hours; those with EUR payables should note that EUR/USD's hold above 1.1550 remains the key near-term support, and a break below it on hawkish FOMC minutes could open a swift move toward 1.1500.

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.