GBP/USD + GBP/EUR Market Update

Sterling Holds Near Three-Month Lows as Gilt Yields Test 5.43% and Budget Countdown Weighs; EUR/USD Slips Below 1.1370 Ahead of Pivotal Eurozone Flash CPI, Tuesday, 29 September 2026

GBP/USD: 1.3234 | GBP/EUR: 1.1660 | EUR/USD: 1.1350

All three pairs are consolidating near recent lows as elevated US Treasury yields and a broadly firm dollar continue to dominate. The pound is trading with a slightly bearish bias on Tuesday, with GBP/USD around 1.3250 and EUR/GBP near 0.8583. The pivotal event today is the Eurostat flash CPI estimate for September, due at 10.00am London time, which will set the tone for EUR/USD and, by extension, GBP/EUR for the remainder of the week.

Overnight & Market Tone:

Sterling weakened slightly towards $1.32, close to its weakest level in three months, as investors turned to safe-haven assets amid fading optimism that progress could be made in talks between the US and Iran. The macro backdrop argues for caution: Brent crude is around $106-107 per barrel and global bond yields are climbing sharply, with the UK 10-year gilt yield rising to roughly 5.43%. The FTSE 100 DFB is around 10,716, with both daily and intraday charts showing the index struggling beneath an important cluster of resistance, having drifted below short-term averages overnight. Risk sentiment is fragile, with elevated energy prices and the approaching 28 October Budget keeping gilt markets under pressure and limiting any meaningful sterling recovery.

UK Data & Bank of England:

At its meeting ending on 16 September 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 4.00%. Protracted conflict in the Middle East has contributed to further increases in crude and refined energy prices, and UK CPI inflation increased to 3.1% in August and is likely to rise further over coming quarters. The MPC said inflation is expected to rise in coming quarters, reaching "slightly above 4% in 2027 Q1". Governor Bailey has been explicit on the conditionality: "the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target." The next scheduled Bank of England rate decision is on 5 November 2026, and the market currently prices a move of +17 basis points at that MPC meeting. Markets are pricing in a rise later this year and further increases in 2027, with four quarter-point rises in total by July 2027. The 5 November meeting is particularly consequential: it falls right after the Autumn Budget on 28 October, and the MPC will be taking the market reaction to any Budget announcements into account. On the growth side, GDP is estimated to have grown by 0.4% in May-July 2026 compared to the previous three-month period, following growth of 0.3% in June, though construction and production both fell by 0.5%. The ONS quarterly economic commentary for April-June 2026 is due tomorrow (30 September), which may provide additional colour on the growth-inflation trade-off facing the MPC.

European Backdrop & EUR/USD:

On 10 September 2026, the ECB raised all of its key rates by 25 basis points, with the new levels applying from 16 September. The ECB deposit facility rate currently stands at 2.50%. At the press conference following the September meeting, ECB President Lagarde said risks to growth are tilted to the downside, while inflation risks are currently tilted to the upside, reiterating that future decisions will be made on a meeting-by-meeting basis. Lagarde said the inflation outlook for 2027 and 2028 is now higher than policymakers expected a few months ago, mainly due to higher energy prices, but noted there is no evidence yet of energy costs feeding into higher wages, adding that a measured policy response remains appropriate. The most recent confirmed eurozone inflation data showed eurozone annual inflation at 3.2% in August 2026, driven largely by a surge in energy prices amid continued fighting in the Middle East. Energy inflation jumped to 14.3%, its highest since January 2023, while services inflation eased to a four-month low of 3.0% and core inflation edged down to 2.4% from 2.5%. The Conference Board notes that the ECB is not expected to tighten further, as the latest increase in headline inflation was overwhelmingly energy-driven while underlying price pressures continued to moderate, with core inflation declining to 2.4% and services inflation falling to 3.0%.

For EUR/USD specifically, the pair is testing the 1.1350 level that has acted as a key technical floor since mid-September. EUR/USD remains vulnerable below 1.1400, with 1.1350 acting as the key downside level. For the next ECB meeting on 29 October 2026, market pricing implies a 63.0% probability of interest rates remaining at 2.50%, meaning a 37% probability of a hike to 2.75%, a significant softening from the 60% hike probability reported just days ago. The widening Fed-ECB rate differential (Fed funds at 3.75%-4.00% versus ECB deposit rate at 2.50%) is the primary structural headwind for EUR/USD. The 125 basis point gap between Bank Rate at 3.75% and the ECB deposit rate at 2.50% also keeps GBP/EUR supported on dips. Today's Eurostat flash CPI for September (consensus: around 3.2%-3.3% year-on-year) is the pivotal catalyst: a print above 3.3% would likely push October hike probability back towards 50-60% and provide EUR/USD with a meaningful bid, while a softer reading would accelerate the pair's slide towards 1.1300. Money markets are pricing in roughly 100 basis points of ECB rate hikes by the end of 2027, suggesting the market views the current tightening cycle as incomplete regardless of the October outcome. France's growth outlook has been downgraded to just 0.4% for 2026, adding a political and fiscal dimension to the euro's structural vulnerability.

US Backdrop:

The FOMC concluded its September meeting by voting unanimously to raise rates by a quarter point, bringing the federal funds rate to 3.75%-4.00%, amid persistent inflation concerns with core PCE inflation running above 3% every month of 2026. J.P. Morgan Global Research forecasts another quarter-point raise in December, but does not expect a longer-term hiking cycle. As of market close on 25 September, futures markets are pricing the rate to rise to about 4.2% by December and reach roughly 4.8% by September 2027, reflecting expectations for further policy tightening amid persistent inflation and resilient growth. The dollar's broad strength continues to be the dominant cross-asset theme, with US Conference Board consumer confidence data due this afternoon providing the main US calendar event today.

Technical Picture:

GBP/USD: Resistance at 1.3262 (Monday's session high), then 1.3302 (23 September close) and 1.3344 (20 September). Support at 1.3210 (recent three-month low), then 1.3197 (24 September intraday trough) and 1.3150 (psychological).
GBP/EUR: Resistance at 1.1680 (intraday), then 1.1700 (round number) and 1.1720. Support at 1.1640 (Monday's low), then 1.1615 (24-25 September range base) and 1.1580.
EUR/USD: Resistance at 1.1390 (Friday's close), then 1.1418 (23 September) and 1.1460 (20 September reference). Support at 1.1350 (current floor, tested today), then 1.1300 (psychological) and 1.1270.
Outlook: The path of least resistance for GBP/USD and EUR/USD remains to the downside while the dollar retains its yield advantage, though today's eurozone CPI print could trigger a sharp corrective bounce in EUR/USD if it surprises to the upside, which would in turn cap GBP/EUR near current levels.

Today's Calendar:

The 10.00am Eurostat flash CPI for September is today's pivotal release: a reading above 3.3% would likely reignite ECB October hike pricing and provide EUR/USD with a meaningful bid, while a miss below 3.1% could accelerate the pair's slide towards 1.1300 and offer sterling some relative support in GBP/EUR.

Outlook:

GBP/USD is likely to remain range-bound between 1.3200 and 1.3280 near-term, with any recovery capped by the Fed-BoE rate differential and the fiscal uncertainty surrounding the 28 October Budget; Chancellor Healey will deliver the Autumn Budget on 28 October alongside an OBR forecast, with the Treasury stating the Budget will focus on "growth in every postcode" while maintaining fiscal discipline. For EUR/USD, the directional bias hinges on today's CPI print and whether ECB October hike pricing can recover towards 50%, with a hold at 1.1350 support critical to preventing a deeper move towards 1.1270; treasurers with near-term USD payables should consider using any dollar softness as a hedging opportunity given the risk of a further leg higher in the greenback if US data continues to beat expectations.

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.