GBP/USD + GBP/EUR Market Update

Gilt Shock and NFP Friday Squeeze GBP/USD Below 1.3200; EUR/USD Holds Near Multi-Month Lows as Fed-ECB Gap Widens, Friday, 02 October 2026

GBP/USD: 1.3214 | GBP/EUR: 1.1733 | EUR/USD: 1.1262

GBP/USD traded on the back foot during the Asian session, lingering near the previous day's trough, its weakest level since 26 June, and remaining below the 1.3200 handle. A global bond sell-off has seen UK gilt yields hit 6% for the first time in nearly 30 years, heaping pressure on the Chancellor ahead of his inaugural Budget later this month. EUR/USD has stabilised just above 1.1250, having shed more than 4% over the past twelve months, with the pair's near-term direction hinging almost entirely on today's US payrolls print and the evolving Fed-ECB rate differential.

Overnight & Market Tone:

The FTSE 100 fell 1.48% to 10,448.78 points on Thursday, its lowest in three months, as global bond yields rose to multi-decade highs. The 30-year gilt yield reached 5.9773%, its highest since early 1998, while the 10-year yield reached 5.449%, its highest since 2007. The 10-year gilt opened today at 5.4487%, with an intraday high of 5.5098%. Overnight risk sentiment remains fragile: the DXY, which measures the dollar's performance against six currencies, is on the verge of challenging the 102.00 mark. US 10-year Treasury yields also hit 5.306% on Wednesday as investors worried about inflation, deficits and bond supply. GBP/EUR has edged higher to 1.1733 as EUR/USD softness provides a partial offset to GBP weakness, but the cross remains vulnerable to any upside surprise in today's US data that amplifies broad USD demand.

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%. Three members, Megan Greene, Catherine Mann and Huw Pill, voted to raise it to 4%. The majority judged that domestic activity and tight financial conditions were restraining inflation, while warning that the risk of second-round effects was growing. The results of the next scheduled MPC meeting will be announced on 5 November. Traders were pricing in a 95% chance of a Bank of England rate increase at its November meeting as of Thursday, a sharp repricing driven by the gilt yield surge. UK CPI was 3.1% in August 2026, above the MPC's target of 2%. The fiscal backdrop is the dominant medium-term GBP risk: analysts at Pantheon Macroeconomics calculate that a global bond market rout, driven by renewed Middle East conflict, has already slashed Chancellor Healey's fiscal cushion from £23.6 billion at the Spring Statement to roughly £13 billion. Higher yields feed directly into the OBR's interest cost projections, which determine how much room the government has against its self-imposed fiscal rules; the OBR normally conditions its forecast on market-implied expectations averaged over a short window and publishes the market assumptions window about a week before the fiscal event. With the OBR's data window likely to capture current elevated yield levels, the arithmetic for the 28 October Budget is deteriorating in real time.

European Backdrop & EUR/USD:

The ECB deposit rate has stood at 2.50% since 16 September 2026, following two hikes since the Middle East conflict began. At the press conference following the September meeting, ECB President Christine 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. The next Governing Council decision is due on 29 October. Futures pricing on 24 September implied about a 60% chance of a hike to 2.75% on 29 October, according to ECB Watch, though that probability has since been volatile. Pricing for a 29 October ECB hike fell sharply over the past week after President Lagarde advocated a measured response. An upside surprise in eurozone CPI would revive October pricing from the current 2.50% deposit rate and lift Schatz yields, but policymakers including Isabel Schnabel are treating higher bond yields as tightening in their own right.

For EUR/USD specifically, the pair is trading near 1.1262, having weakened more than 3% over the past month and more than 4% over the past year. EUR/USD rose to 1.1247 on 2 October, though over the past month the pair has weakened 3.26% and is down 4.22% over the last twelve months. The dominant driver is the widening Fed-ECB policy rate gap: the Fed raised its target range by a quarter point to 3.75%-4.00% on 16 September, its first increase since 2023, and its latest projections put the median 2026 unemployment rate at 4.1%, PCE inflation at 3.7%, and the year-end federal funds rate at 4.1%, implying one more quarter-point increase this year. With the Fed funds midpoint at 3.875% and the ECB deposit rate at 2.50%, the policy gap of approximately 137 basis points is the widest it has been since the hiking cycle began, and futures markets suggest it could widen further. As of market close on 1 October, futures markets are pricing the fed funds rate to rise to about 4.1% by January and reach roughly 4.7% by October 2027, reflecting expectations for further policy tightening amid persistent inflation pressures and resilient growth. That tension caps the euro's upside even on a hot CPI print, with EUR/USD at a 16-month low, while European rate-sensitive equities remain vulnerable whichever way the data lands. For UK corporates with direct EUR/USD exposures, the pair's inability to sustain rallies above 1.1300 suggests the path of least resistance remains lower near term, though any NFP miss today could trigger a sharp short-covering bounce toward 1.1320-1.1350.

US Backdrop:

At its latest meeting on 16 September 2026, the FOMC voted unanimously to raise the federal funds target range by 25 basis points, from 3.50%-3.75% to 3.75%-4.00%. Sixteen of 19 FOMC members expect at least one more rate hike this year; the average projection for rates at end-2026 rose to 4.1% from the June projection of 3.8%. Markets are divided on October: prediction markets put the probability of no change at the 28 October FOMC meeting at approximately 54%. Today's NFP is therefore pivotal: payroll growth is expected to cool after August's 162,000 increase, but wages, unemployment and revisions may do more than the headline in shaping expectations for another Federal Reserve rate rise. The unemployment rate is expected to remain at 4.1%, with participation broadly steady.

Technical Picture:

GBP/USD: Resistance at 1.3200 (psychological/intraday pivot), then 1.3241 (Thursday's open) and 1.3300 (Wednesday high). Support at 1.3182 (Thursday's session low, also the weakest level since 26 June), then 1.3140 (year-to-date low, June) and 1.3100 (round-number support).
GBP/EUR: Resistance at 1.1750 (intraday high area), then 1.1800 (round number). Support at 1.1700 (near-term pivot), then 1.1660 (this week's low, seen on Tuesday) and 1.1630.
EUR/USD: Resistance at 1.1300 (psychological), then 1.1350 (Tuesday's level) and 1.1400. Support at 1.1247 (today's early print), then 1.1200 (round number) and 1.1150 (extension target if NFP beats strongly).
Outlook: GBP/USD maintains a bearish near-term bias, holding clearly below the cluster of key simple moving averages and broken trend lines overhead. A close below 1.3182 today would open the door to a retest of the 1.3140 year-to-date low, while EUR/USD's inability to recover above 1.1300 keeps the pair's short-term bias negative.

Today's Calendar:

September NFP is the dominant event: a print above 120,000 alongside firm wages would likely cement expectations for a December Fed hike, driving USD higher across all three pairs and pushing GBP/USD toward the 1.3140 year-to-date low; a miss below 60,000 could trigger a sharp reversal, with GBP/USD testing 1.3260 and EUR/USD reclaiming 1.1300.

Outlook:

The bias across all three pairs into the weekend remains USD-positive and GBP-cautious: UK fiscal worries, highlighted by 30-year gilt yields rising above 6%, add pressure on GBP ahead of the 28 October Autumn Budget, and any NFP beat will reinforce the Fed's hawkish dot-plot signal that rates are heading to at least 4.1% by year-end. The key risk scenario for UK treasurers managing GBP/USD payables is a strong NFP print combined with a further gilt yield spike, which could see GBP/USD break below 1.3140 and test 1.3100 before the Budget; conversely, a soft payrolls number would offer a tactical window to cover USD receivables at better levels, though the medium-term GBP outlook remains constrained by fiscal uncertainty and the MPC's hawkish minority.

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.