GBP/USD + GBP/EUR Market Update

Sterling Slips as USD Buying Persists and Budget Countdown Intensifies; EUR/USD Holds Near Recent Lows Ahead of Eurozone Flash CPI and US ISM, Thursday, 01 October 2026

GBP/USD: 1.3241 | GBP/EUR: 1.1711 | EUR/USD: 1.1306

GBP/USD has retreated further from the one-week high above 1.3300 touched on Wednesday, with spot trading just above the mid-1.3200s in the Asian session. EUR/USD fell to 1.1316 on 1 October, down 0.12% from the previous session, with the pair sitting near its lowest level since May 2025. The two key intraday events are the Eurozone flash CPI for September at 10.00am and the US ISM Manufacturing PMI at 15.00, either of which could materially reprice rate differentials across all three pairs.

Overnight & Market Tone:

Oil-driven inflation risks are keeping US bond yields elevated near multi-year highs and supporting the dollar, while BoE rate-hike expectations are providing only partial support for GBP. The US Treasury yield curve as of 30 September showed the 10-year at 5.29% and the 2-year at 4.90%, sustaining upward pressure on the dollar across the board. The 10-year gilt yield opened at 5.407% and has traded in a 5.3505%-5.4257% range today, easing modestly from Wednesday's close of 5.4147% but remaining near multi-year highs that continue to weigh on UK risk sentiment. Brent crude fell to around $96.76/bbl on 1 October, down 1.30% from the previous day, offering some relief on the inflation-via-energy channel, though the year-on-year gain of over 50% means the structural inflation impulse remains firmly in place. Risk appetite is cautious; the combination of elevated sovereign yields and geopolitical uncertainty is keeping equity pre-market tone subdued.

UK Data & Bank of England:

UK headline CPI accelerated to 3.1% in the 12 months to August 2026, up from 2.9% in July, matching the consensus forecast. Petrol prices rose sharply, pushing motor fuel inflation to 23.0% from 15.5%, while housing and household services inflation also ticked higher to 4.9%. The next CPI reading, covering September, is due on 21 October, ahead of the 5 November MPC meeting. The MPC voted 6-3 to hold Bank Rate at 3.75% at its meeting ending 16 September 2026, the sixth hold of the year, with the three dissenting members arguing that a proactive 25bp hike to 4.00% would reduce the risk of second-round inflation effects. The next scheduled MPC decision will be announced on 5 November. OIS markets continue to price a meaningful probability of a hike at that meeting, consistent with the 6-3 vote split and the persistence of above-target inflation. On the activity side, the September flash composite PMI came in at 51.7, below the 52.0 consensus, with S&P Global noting that output growth has slowed to a pace consistent with quarterly GDP growth of only around 0.1%, hamstrung by high energy prices, elevated business costs, and uncertainty ahead of the autumn Budget. The final September manufacturing PMI (flash: 52.0) is due at 09.30 this morning and will be watched for any revision. The ONS publishes average household income data for the financial year ending 2025 at 09.30 today, a second-tier release unlikely to move FX materially. The 28 October Budget remains the dominant medium-term risk for GBP, with markets alert to any pre-Budget fiscal signals from HM Treasury.

European Backdrop & EUR/USD:

The ECB deposit facility rate stands at 2.50%, and as of 24 September, futures pricing implied approximately a 60% chance of a hike to 2.75% at the 29 October meeting. More recent ECB-Watch data, however, shows that pricing has shifted: for the 29 October meeting, market pricing now implies a 70% probability of no change, with only a 30% probability of a hike to 2.75%. This cooling of ECB hike expectations is one of the factors weighing on EUR/USD. The ECB's 2026 rate path has seen two hikes: a 25bp move to 2.25% on 11 June and a further 25bp move to 2.50% on 10 September. The ECB cited the Middle East conflict as continuing to fuel inflationary pressures, with the main refinancing rate now at 2.65%. Today's Eurozone flash CPI for September (10.00am London) is the single most important near-term catalyst for EUR/USD: the August flash estimate came in at 3.3%, with the final reading confirmed at 3.2%, and a September print above that level would likely revive October hike pricing and provide EUR/USD with a floor, while a softer reading would reinforce the current drift lower.

For EUR/USD specifically, the pair has fallen to its lowest level since May 2025, with EUR/USD hitting 1.1312 on Wednesday and trading well below the January peak of 1.2082. Over the past month, EUR/USD has weakened 2.35% and is down 3.41% over the last 12 months. The rate differential is the key driver: the Fed raised its target range to 3.75%-4.00% at its 16 September meeting, while the ECB deposit rate sits at 2.50%, leaving a 125-150bp policy gap that continues to attract dollar demand. The Fed's median dot plot projection was raised to 4.1% for 2026, signalling the potential for another hike by year-end. As of 28 September, futures markets were pricing the Fed funds rate to rise to approximately 4.3% by December and around 4.9% by September 2027, a path that keeps the ECB-Fed differential wide and limits EUR/USD upside. The ECB General Council meets today (1 October) but this is a non-monetary policy session; no rate change is on the agenda. Treasurers with direct EUR/USD exposures should note that the pair is trading near the lower end of its recent range, with the 29 October ECB decision and the 28 October FOMC meeting both approaching within the same week, creating elevated event risk for EUR/USD in late October.

US Backdrop:

The Fed's unanimous 25bp hike to 3.75%-4.00% at its 16 September meeting marked the first rate increase in more than three years, with Chair Kevin Warsh building broad support for a firmer inflation response. Investors now anticipate three additional hikes by mid-2027, including one more in 2026, though the path remains conditional on incoming data. Today's key US release is the ISM Manufacturing PMI for September at 15.00 London time: consensus is for a reading of 54.8, up from August's 54.6, and a beat would reinforce USD strength and add further pressure to both GBP/USD and EUR/USD.

Technical Picture:

GBP/USD: Resistance at 1.3300 (Wednesday's one-week high), then 1.3383 (20-day EMA) and 1.3439. The pair retains a bearish near-term tone following the overnight failure near the 23.6% Fibonacci retracement of the August-September downswing, with successive overhead barriers at 1.3383 and 1.3439 reinforcing a downside bias. Support at 1.3220 (recent range low), then 1.3200 (key psychological level).
GBP/EUR: Resistance at 1.1730 (intraday), then 1.1760 and 1.1800. Support at 1.1690 (Wednesday's close), then 1.1660 (recent range low). The pair has recovered modestly from the 1.1660 lows seen in late September, with the BoE-ECB rate differential of 125bp providing a structural floor.
EUR/USD: Resistance at 1.1330 (overnight high), then 1.1350 and 1.1380. Support at 1.1300 (psychological), then 1.1280 and 1.1250. The pair is near a one-year low, having hit 1.1312 on Wednesday.
Outlook: The technical bias across all three pairs favours continued USD strength unless today's Eurozone CPI or ISM data deliver a meaningful surprise; a break below 1.3200 in GBP/USD would open the way for a test of the three-month low near 1.3180, while EUR/USD needs to reclaim 1.1350 to ease immediate downside pressure.

Today's Calendar:

The Eurozone flash CPI at 10.00am is the highest-impact release of the day for all three pairs, with a reading above August's 3.2% likely to revive ECB October hike pricing and provide EUR/USD with near-term support, directly affecting the cost of EUR hedges for UK corporates.

Outlook:

The path of least resistance for GBP/USD and EUR/USD remains to the downside while the Fed-BoE and Fed-ECB rate differentials stay wide, with the 28 October Budget adding a UK-specific risk premium that limits GBP recovery potential. Treasurers with USD payables face the most acute near-term cost risk and should review forward cover levels ahead of the late-October cluster of event risk, which includes the Budget, the FOMC decision (28 October), and the ECB meeting (29 October), all within a 48-hour window.

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.