GBP/USD + GBP/EUR Market Update

Sterling Steadies Above 1.3220 as Soft NFP Caps Fed Bets; EUR/USD Holds Near 17-Month Lows on French Fiscal Stress, Tuesday, 06 October 2026

GBP/USD: 1.3239 | GBP/EUR: 1.1776 | EUR/USD: 1.1242

Friday's unexpectedly weak US nonfarm payrolls report (29,000 vs consensus 90,000, per Bloomberg) briefly lifted GBP/USD and EUR/USD on reduced October Fed hike expectations, but both pairs have since given back much of that relief as French sovereign spread widening and persistent UK gilt market pressure reassert themselves. EUR/USD declined to around 1.1220 in early Asian trading on Tuesday, with the euro weakening near a 17-month low against the dollar amid growing concern over France's debt position. Today's main scheduled catalysts are the UK Construction PMI and eurozone retail sales, both due this morning.

Overnight & Market Tone:

GBP/USD traded in a day's range of 1.3213-1.3232 on Monday, with a previous close of 1.3221. GBP/EUR was quoted around 1.1787 and EUR/USD near 1.1219 in early London trade. Risk sentiment is cautious: the FTSE 100 last closed at 10,504, having recovered from a recent low of 10,462. The gilt market remains the dominant domestic pressure point. The UK 10-year gilt yield was quoted at 5.3839% in early trade, having closed at 5.3947% on Monday, after touching a session high of 5.4076% and a 52-week peak of 5.5098% earlier in the week. UK 30-year gilt yields hit 6%, their highest since February 1998, earlier last week. Bund and UST yields remain elevated in sympathy, keeping risk appetite subdued across European equity futures.

UK Data & Bank of England:

Today's main UK release is the September Construction PMI at 08.30am, with consensus at 44.9 against a prior reading of 44.3. A reading below 50 would extend the run of contraction in the sector and add to the narrative of uneven UK growth. The broader data backdrop is consistent with that picture: UK GDP growth was 0.5% in Q2 2026, slowing from 0.6% in Q1, with annual growth at 1.4%. UK CPI accelerated to 3.1% in August, up from 2.9% in July, driven in material part by energy costs linked to the Strait of Hormuz disruption. The Bank of England's own forecasting projects CPI reaching 3.75% by end-2026 and edging just above 4% at the start of 2027, twice the 2% target. Against that backdrop, the MPC held Bank Rate at 3.75% on 17 September in a 6-3 vote. The Bank said inflation risks are tilted further to the upside, so a November rise is a live possibility. OIS markets are pricing this aggressively: the November 5 meeting is currently priced at approximately 87% probability of a hike, implying a move of around 21.7 basis points. For GBP, this hawkish MPC tilt is a structural support, but it is being offset by the fiscal risk premium embedded in gilt yields. KPMG estimates that Chancellor Healey's fiscal buffer will shrink to about £12 billion by the autumn, down from £23.6 billion when the spring forecast was published. This leaves Healey facing difficult choices ahead of his Budget on 28 October, with higher taxes or reductions in public spending potentially required to restore the government's previous margin. Any Budget announcement that disappoints on fiscal consolidation could reignite gilt selling and weigh on GBP.

European Backdrop & EUR/USD:

The euro is under dual pressure: a hawkish ECB that has failed to translate rate hikes into currency strength, and a French fiscal situation that is actively widening sovereign spreads. The ECB raised all key rates by 25 basis points on 10 September 2026, taking the deposit facility rate to 2.50%. The ECB kept its 2026 inflation forecast at 3.0% but revised projections higher for 2027 and 2028, to 2.5% and 2.1% respectively. The next Governing Council rate decision is on 29 October, a non-projection meeting. Markets currently price an 87% probability of no change at that meeting, with only a 13% chance of a further hike to 2.75%. December is where the market sees the next live move: OIS pricing implies roughly a 48% probability of the deposit rate reaching 3.00% by December 2026. The ECB's inability to draw currency strength from its tightening cycle reflects a structural vulnerability: the ECB's 2026 growth forecast of 0.9% leaves little room to absorb dearer energy and dearer credit simultaneously. On the political side, the euro fell to 1.1161 against the dollar on Monday, its weakest since May 2025, after Spain's Pedro Sanchez called a snap general election for 29 November and the French spread over Germany re-widened to 147 basis points. French spreads to Bunds neared 130 basis points in the prior session, with Jefferies noting they are "not inclined to buy France". Today's eurozone retail sales (09.00am, consensus +0.2% month-on-month) offer a modest upside risk for EUR/USD if they beat, but the political and fiscal headwinds are likely to dominate. Reuters reported that the US dollar is hovering around a 17-month high and is heading for a third consecutive weekly advance as turmoil in global bond markets, fiscal concerns in France and persistent inflation risks weigh on European assets. For treasurers with direct EUR/USD exposures, the pair is trading in a technically fragile zone: the next support comes in at 1.1090, and if that level breaks, lower prices at 1.0945 can be expected. Resistance is clustered around 1.1260-1.1289. The ECB-Fed rate differential (deposit rate 2.50% vs Fed funds 3.75%-4.00%) continues to mechanically favour the dollar, and absent a material shift in French politics or a decisive ECB signal for December, EUR/USD is likely to remain offered on rallies.

US Backdrop:

Nonfarm payrolls increased by just 29,000 in September, with the unemployment rate rising to 4.2%, and traders quickly pared back expectations for another rate hike in October. The Fed Rate Monitor Tool now shows a 75.9% probability of rates remaining at 3.75%-4.00% at the 28 October FOMC meeting, compared with 27.7% just one week ago. However, Fed Governors Michael Barr and Lisa Cook have recently reinforced a hawkish stance, highlighting a strong economy and new inflationary risks from AI, oil prices and geopolitical events. Futures markets are pricing the rate to rise to about 4.1% by January 2027 and roughly 4.8% by October 2027, keeping US Treasury yields elevated and the dollar broadly supported even as near-term hike bets have softened. Today's US calendar is light, with no tier-one releases scheduled.

Technical Picture:

GBP/USD: Resistance 1.3270 (intraday pivot), 1.3300 (psychological), 1.3350 (mid-September high). Support 1.3213 (Monday session low), 1.3140 (year-to-date low area), 1.3090 (next structural level).
GBP/EUR: Resistance 1.1800 (round number), 1.1850, 1.1900. Support 1.1750 (near-term floor), 1.1700, 1.1644 (recent multi-week low).
EUR/USD: Resistance 1.1260 (intraday cap), 1.1289 (broken neckline, now resistance), 1.1350. Support 1.1161 (Monday low, 17-month trough), 1.1090 (next technical level per Societe Generale), 1.0945.
Outlook: GBP/USD remains rangebound in the low-1.32s with a modest upside bias if gilt yields stabilise, while EUR/USD is technically vulnerable below 1.1260 and any re-widening of French spreads or hawkish Fed commentary could push the pair toward the 1.1090 support zone.

Today's Calendar:

The 09.00am gilt auction is the session's most market-sensitive event: a weak bid-to-cover ratio would push 10-year yields higher, tighten fiscal headroom further and weigh on GBP/USD, while a solid auction could offer the pair a modest relief bid.

Outlook:

GBP/USD is likely to remain anchored in the 1.3200-1.3270 range ahead of the 28 October Budget, with the gilt auction and any further French spread widening the key intraday swing factors; a break below 1.3213 reopens the year-to-date low near 1.3140. EUR/USD faces the greater directional risk: if French spreads continue to widen and the 1.1161 floor gives way, the 1.1090 level identified by Societe Generale becomes the next credible target, with material implications for UK corporates managing euro-denominated payables and receivables directly against the dollar.

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.