GBP/USD + GBP/EUR Market Update

Sterling Steadies as Budget Countdown Intensifies and Gilt Yields Hold Near 19-Year Highs; EUR/USD Pivots on Eurozone Flash CPI, Wednesday, 30 September 2026

GBP/USD: 1.3265 | GBP/EUR: 1.1690 | EUR/USD: 1.1347

GBP/USD has edged back to 1.3265 in early London trade, recovering from Tuesday's session low near 1.3224, as month-end rebalancing flows provide modest support and markets await the Eurostat flash CPI print due at 10.00am. Elevated oil prices, amid stalled talks to reopen the Strait of Hormuz, continue to reinforce expectations of further Fed tightening and support safe-haven demand for the dollar. GBP/EUR has firmed to 1.1690 from 1.1660 yesterday, while EUR/USD sits just below 1.1350, with the pair's near-term direction entirely contingent on this morning's inflation data.

Overnight and Market Tone:

GBP/USD traded at 1.3269, up 0.31% as of early London, with GBP/EUR at 1.1684. The recovery from Tuesday's lows reflects a combination of month-end portfolio rebalancing and a modest pullback in the dollar index overnight. The FTSE 100 closed Monday at approximately 10,685, broadly flat, while the DAX eased 0.13% and the CAC 40 was fractionally higher. The 10-year gilt yield rose to 5.42% on Tuesday, and has since edged toward 5.44%, its highest level since July 2007. US Treasuries have paused near recent peaks, with the 10-year yield having touched 5.18% and the 30-year reaching 5.47%. Brent crude rose toward $108 a barrel on Monday, recovering from a 2.1% decline in the prior session, as fading hopes for a diplomatic breakthrough between the US and Iran renewed supply concerns. Risk sentiment remains cautious but not panicked, with VIX at 15.90.

UK Data and Bank of England:

At its meeting ending 16 September, the MPC voted 6-3 to maintain Bank Rate at 3.75%, with three members voting to increase by 25 basis points to 4%. 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. The hawkish minority is growing louder: Deputy Governor Dave Ramsden said he would support rate hikes if "upside pressures" on inflation persist, echoing recent warnings from Governor Andrew Bailey that higher energy prices could fuel a wage-price spiral. OIS markets are pricing aggressively: markets are pricing an 85% probability of a 25bp rate hike at the 5 November MPC meeting, with roughly four increases priced in by mid-2027. The market currently prices a move of approximately +21bp at the November meeting. The Budget on 28 October sits one week before the MPC decision, creating a sequencing risk: higher borrowing costs have eroded roughly half of the £23.6 billion fiscal headroom Healey inherited, and a key decision for the Burnham government is how far to rebuild that buffer to keep investors on side. Tuesday's BoE consumer credit data came in at £2.46 billion against a £1.9 billion forecast, and mortgage approvals printed at 54.92K versus 56.1K expected, a mixed picture that does little to alter the hawkish MPC trajectory. There are no major UK data releases due today; the next significant domestic print is the ONS GDP estimate for August, expected later this week.

European Backdrop and EUR/USD:

The ECB raised all key rates by 25 basis points at its 10 September meeting, taking the main refinancing rate to 2.65% and the deposit rate to 2.50%. The ECB stated that the conflict in the Middle East continues to fuel inflationary pressures, with inflation expected to remain well above its 2% target for an extended period. ECB President Lagarde has said 2027 and 2028 inflation forecasts have risen on higher energy prices, with no sign yet of energy costs feeding wages, and called for a measured policy response. The October meeting on 29 October is a non-projection round: ECB-Watch currently prices a 63% probability of no change at the 29 October meeting, implying a 37% chance of a further hike to 2.75%. Markets price roughly 100 basis points of ECB tightening by end-2027, with today's eurozone inflation data the near-term test. Today's Eurostat flash CPI for September is the pivotal event for EUR/USD. The flash estimate covering September 2026 data is typically published on the last working day of the reference month, around 30 September. The August flash estimate put euro area annual inflation at 3.3%, up from 2.9% in July, matching consensus and marking the highest reading since 2023. The jump was driven almost entirely by energy, where annual inflation surged to 14.3% from 10.3% in July amid renewed disruption to Strait of Hormuz shipping. Consensus for September is centred around 3.3%-3.4%, with services inflation the key swing factor. A print at or above 3.4% would likely push October hike probability materially above the current 37%, providing direct support to EUR/USD and compressing GBP/EUR. A softer reading, particularly if services inflation eases further from August's 3.0%, would reinforce the ECB's "measured" language and cap EUR/USD near 1.1380. The eurozone's subdued growth outlook, with GDP expected to expand just 0.9% this year, continues to limit the scope for aggressive ECB tightening and acts as a structural ceiling on EUR/USD even if today's CPI surprises to the upside. EUR/USD has been trading in a 1.1320-1.1380 range this week; a sustained break above 1.1380 requires both a hot CPI print and a softening in Fed hike expectations, which looks unlikely given current FOMC guidance.

US Backdrop:

The Fed unanimously raised the target range for the federal funds rate by 25bp to 3.75%-4.00% in September 2026, marking the first rate hike since 2023, with policymakers noting that inflation remains elevated. However, pushback has emerged: Federal Reserve Bank of New York President John Williams said on Tuesday there is "no need for urgency" to raise interest rates again after the September move. Despite that, prediction markets put the probability of a hike at the 28 October FOMC meeting at approximately 69%, with the full split at 69% hike, 30% hold. Today's key US release is August PCE inflation at 13.30pm London time: the Cleveland Fed nowcast points to approximately 3.8% headline and 3.4% core. A hot PCE print would reinforce dollar demand and cap any GBP/USD recovery.

Technical Picture:

GBP/USD: Resistance at 1.3290 (Tuesday's session high), then 1.3340 (last week's range top). Support at 1.3224 (Tuesday's low), then 1.3200 (round-number psychological level) and 1.3175 (June 2026 trough area).
GBP/EUR: Resistance at 1.1710 (intraday high), then 1.1740 (25 September peak). Support at 1.1660 (Tuesday's close), then 1.1630 (multi-week low).
EUR/USD: Resistance at 1.1380 (this week's range ceiling), then 1.1420 (early September level). Support at 1.1320 (Tuesday's intraday low), then 1.1290 (three-month low area).
Outlook: All three pairs remain in compressed ranges ahead of the dual catalysts of Eurostat CPI (10.00am) and US PCE (1.30pm); a break in either direction is more likely to be sustained in GBP/USD and EUR/USD than in GBP/EUR, where the competing BoE and ECB hike narratives broadly offset one another.

Today's Calendar:

The 10.00am Eurostat flash CPI is today's dominant event: a September print above 3.4% would materially shift October ECB hike pricing and drive EUR/USD toward 1.1380-1.1420, while a softer reading risks a retest of 1.1290-1.1320 support; the 1.30pm US PCE data then determines whether any morning EUR/USD move holds into the New York session.

Outlook:

The bias for GBP/USD remains modestly bearish into month-end: the combination of a hawkish Fed, a 28 October Budget that markets fear may disappoint on fiscal headroom, and 10-year gilt yields near 19-year highs at approximately 5.44% leaves sterling vulnerable to a retest of 1.3200 on any PCE upside surprise or Budget-related headline. Treasurers with USD payables due in October should consider using any GBP/USD recovery toward 1.3290-1.3340 to layer in forward cover, while those managing EUR exposures should monitor the 10.00am CPI print closely before acting, given the potential for a 30-50 pip swing in GBP/EUR on a significant deviation from consensus.

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.