GBP/USD + GBP/EUR Market Update

GBP Firms on GDP Beat; EUR/USD Recovers Above 1.1230 as Warsh Dims October Hike Odds; Nagel and Final Euro-Area CPI in Focus, Friday, 16 October 2026

GBP/USD: 1.3305 | GBP/EUR: 1.1562 | EUR/USD: 1.1477

The ONS released August monthly GDP on Thursday, showing growth of 0.1% month-on-month against a consensus forecast of a 0.1% contraction, a result that briefly lifted GBP/USD and reinforced the case for a BoE hike next month. Overnight, Fed Chair Warsh's remarks at the IMF-World Bank meetings in Bangkok signalled a possible hold at the October FOMC, causing the probability of an October rate increase to fall from around 27% to less than 15%, with US equity futures rising and the dollar edging lower. The combined effect has pushed EUR/USD back above 1.1200 and GBP/USD to a fresh week-high, though French fiscal concerns continue to cap euro gains.

Overnight & Market Tone:

GBP/USD rose to 1.3305 on 16 October, up 0.22% from the previous session. EUR/USD climbed back above 1.1200 and reached its best level since 9 October, touching just short of 1.1250 before dipping back, leaving the pair around 1.1230-1.1240 in early London trade. Brent crude fell to $105.34 per barrel on 16 October, down 0.55% from the previous day, providing modest relief to inflation-sensitive assets. The 10-year gilt yield is trading around 5.405%, with a day's range of 5.3919% to 5.4210%, easing slightly from Thursday's close of 5.4537% as the GDP beat and Warsh's dovish-leaning tone supported a mild risk-on tone. European equity pre-markets are cautiously firmer, tracking the overnight US futures move.

UK Data & Bank of England:

Thursday's data flow was unambiguously positive for GBP. UK GDP grew 0.1% month-on-month in August, defying the consensus forecast for a 0.1% contraction; services output grew 0.9% in the three months to August, though production fell 0.2%, and on a monthly basis GDP grew 0.1% in August following an unrevised 0.4% growth in July. Over the longer term, GDP grew 1.8% in the three months to August 2026 compared with the same period a year earlier, the strongest such reading since October 2022. This resilience matters for MPC deliberations: the Bank held Bank Rate at 3.75% on 17 September in a 6-3 vote, with three members voting for an immediate rise to 4%. The Bank'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. As of 15 October, OIS pricing implies a 95% probability of a hike at the 5 November MPC meeting, with a market-implied move of +24 basis points from the current Bank Rate of 3.75%. Chief Economist Huw Pill's scepticism earlier this week about the full extent of market hike pricing (noted in Wednesday's commentary) has not materially dented those odds given the GDP upside surprise. The next major domestic data point is ONS CPI for September, due on 21 October; UK CPI rose to 3.1% in the 12 months to August, driven by motor fuel and energy prices, and a further acceleration would cement the November hike case. The Bank has said inflation risks are tilted to the upside, so a November rise is a live possibility.

European Backdrop & EUR/USD:

The ECB's policy stance and French fiscal stress remain the twin drivers of EUR/USD. The ECB deposit facility rate increased to 2.50% in September from 2.25% in August 2026, the second consecutive 25 basis point rise this year. For the 29 October meeting, market pricing implies an 86% probability of no change, with only a 14% chance of a further hike. A Reuters poll indicates the ECB is expected to leave its deposit rate unchanged at 2.50% in October before delivering a 25 basis point rise in December, as inflation continues to run at nearly twice the central bank's 2% objective. ECB President Lagarde has noted that energy-driven inflation has not yet spilled over into the broader euro-area economy, reinforcing arguments for a more cautious approach.

The most acute near-term EUR risk is French fiscal stress. The OAT-Bund spread rose above 150 basis points earlier this month, the most since the euro debt crisis around 2011. The French government's 2027 budget, which aims to save some EUR 54 billion and narrow the deficit to 5% of GDP from an expected 5.4%, faces a rocky passage through a divided parliament. Citi analysts believe that growing fiscal risks in France could prompt the ECB to pause its rate hikes after December, or even sooner if financial stress begins to spread across the eurozone. The euro has been weak against the Swiss franc as well as the dollar, with EUR/CHF down around 1.3% since 1 October, suggesting a euro-specific risk premium rather than a pure dollar story.

For EUR/USD specifically, the pair has recovered from its 17-month low near 1.1110 hit mid-week to trade around 1.1230-1.1250 this morning, aided by the Warsh-driven dollar softness. Bundesbank President Nagel is briefing reporters in Bangkok this morning alongside German Finance Minister Klingbeil; final euro-area September CPI follows at 09.00am, with the core rate forecast unchanged at 2.5%. The euro and short-dated Bunds are most sensitive to any steer from Nagel on December; a clear endorsement of a further hike would firm rate support for the single currency, while any nod to French fiscal strain as a reason for caution would point the other way. French EU-harmonised inflation accelerated to 3.4% year-on-year in September from 2.6% in August, the highest since January 2024, complicating the ECB's task. Treasurers with direct EUR/USD exposures should treat the 1.1200 level as the near-term pivot: a hold above it on the CPI print and a neutral-to-hawkish Nagel could push the pair towards 1.1280-1.1300, while any fresh French fiscal headlines or a soft CPI reading that undermines the December hike case could see a retest of 1.1150.

US Backdrop:

Fed Chair Warsh declined to provide guidance on the 27-28 October FOMC decision, emphasising that the Fed would no longer routinely preview its interest-rate moves. His refusal to provide further guidance came despite stronger-than-expected US CPI and PPI reports this week, which had renewed speculation about another rate increase, though Warsh gave no indication whether the latest inflation developments warranted action this month or later in the year. Goldman Sachs said the Fed will skip an October rate increase and deliver its final increase of the year in December. Warsh's appearance came shortly before the Fed's pre-meeting communication blackout, leaving investors without a clearer signal on the October policy decision. There are no major US data releases today; the FOMC blackout period begins this weekend, making the 28 October decision the next key USD catalyst.

Technical Picture:

GBP/USD: Resistance at 1.3310 (overnight high), then 1.3340 (mid-October range top) and 1.3380. Support at 1.3270 (our database reference), 1.3230 (Thursday's intraday low) and 1.3200 (psychological and recent cycle low).
GBP/EUR: Resistance at 1.1580 (intraday), then 1.1620 and 1.1650. Support at 1.1540, 1.1500 and 1.1460. The pair has compressed sharply from the 1.18 area seen earlier this week, reflecting EUR recovery rather than GBP weakness; the 1.1540-1.1580 band is the immediate battleground.
EUR/USD: Resistance at 1.1250 (overnight high), then 1.1280 and 1.1300 (descending trendline from September peak). Support at 1.1200 (key psychological level), 1.1150 and 1.1110 (17-month low). The pair needs a clean break and close above 1.1250 to shift the near-term bias from neutral to constructive.
Outlook: GBP/USD retains a mild upside bias while above 1.3270 given the GDP beat and near-certain BoE hike pricing, but EUR/USD remains the more volatile pair today given the Nagel briefing and CPI release; a divergence between a firmer EUR/USD and a steady GBP/USD would compress GBP/EUR back towards 1.1500.

Today's Calendar:

The 09.00am euro-area final CPI print is the key event for EUR/USD today; any upside surprise to the core reading would reinforce the December ECB hike case and could push EUR/USD back towards 1.1280, while a soft reading would renew pressure on the pair and weigh on GBP/EUR.

Outlook:

GBP/USD is biased modestly higher into next week, supported by near-certain BoE hike pricing and a resilient UK growth picture, though the pair's upside is capped by elevated gilt yields and a dollar that retains safe-haven demand while geopolitical risks persist around Brent at $105. EUR/USD faces a binary outcome at today's CPI: a core reading at or above 2.5% alongside a hawkish Nagel steer could sustain the recovery towards 1.1280-1.1300, but persistent French fiscal stress and the risk that the ECB pauses after December mean any rally is likely to be sold, keeping the pair anchored in a 1.1150-1.1280 range ahead of the 29 October ECB and 28 October FOMC decisions.

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.