GBP/USD + GBP/EUR Market Update

Hot UK CPI Cements BoE Hike Odds; GBP Struggles to Hold Gains as EUR/USD Faces French Fiscal Headwinds, Wednesday, 21 October 2026

GBP/USD: 1.3389 | GBP/EUR: 1.1927 | EUR/USD: 1.1226

Financial markets are relatively quiet midweek amid a lack of key macroeconomic data beyond the UK inflation release, and although GBP shows some volatility following the CPI print, it is struggling to make a decisive move in either direction. The euro is under additional pressure from political unrest and fiscal concerns in France. With the FOMC, UK Budget, and ECB all due next week, the market's reluctance to extend directional positions is understandable.

Overnight and Market Tone:

After gaining about 0.5% and reaching its highest level since mid-September above 1.3400 on Tuesday, GBP/USD trades flat near 1.3370 in the European morning on Wednesday. GBP/EUR is quoted around 1.1913, up 0.06% on the day, while EUR/USD trades near 1.1226, down 0.10%. London shares faced a split opening after British inflation exceeded forecasts and oil returned above $110 a barrel, with FTSE 100 futures pointing just 0.1% higher. The 10-year gilt yield eased marginally to 5.44% on Tuesday, though it is pushing back toward 5.45% this morning as the hotter CPI print reinforces rate expectations. The VIX stands at 17.31, reflecting a cautious but not distressed risk environment ahead of a crowded central bank week.

UK Data and Bank of England:

The ONS reported that CPI rose 3.5% in the 12 months to September 2026, up from 3.1% in August, with prices rising 0.4% on a monthly basis. Core CPIH (excluding energy, food, alcohol, and tobacco) rose 3.1% in the 12 months to September, up from 2.9% in August, with the CPIH services annual rate rising from 3.6% to 3.9%. The rate in September 2026 was the highest since September 2023. Services inflation continues to run at 3.7% in September, up from 3.4% previously - a figure the MPC will find particularly difficult to dismiss. ONS chief economist Grant Fitzner noted diesel reached its highest price since July 2022, while services inflation also beat forecasts, a harder signal for the Bank of England to dismiss.

One analyst noted that September's rise in inflation is "likely to have been followed by another jump in October, with higher energy prices lifting inflation towards 3.8%, before fresh energy bill rises in January drive it close to 4.5%." The Bank of England expects inflation to average 3.75% in the final quarter of 2026 before rising to 4% in the first quarter of 2027. Against this backdrop, OIS markets, as of yesterday's close, price a 93% probability of a hike at the 5 November MPC meeting, with a market-implied move of approximately +23 basis points from the current Bank Rate of 3.75%. A Reuters poll found that 54 of 63 economists expect the Bank of England to raise interest rates to 4%. Governor Bailey is expected to speak today; markets will be watching closely, with UK CPI above the 3.4% forecast seen as capable of strengthening the pound, while any cautious tone from Bailey could temper the reaction. Treasurers should note that Chancellor John Healey will deliver his first Budget on 28 October, alongside the OBR's latest economic and fiscal forecasts, which will be the first OBR projections since the Iran war led to rising global energy prices.

European Backdrop and EUR/USD:

For the ECB's next meeting on 29 October 2026, market pricing implies a 91% probability of no change, with the deposit rate held at 2.50%. Analysts expect the ECB to keep policy rates unchanged, with the deposit rate at 2.50%, in line with consensus and market pricing; while euro-area inflation surprised to the upside in September, rising to 3.7% year-on-year, the spillovers from energy costs to underlying inflation remain very muted. The ECB is not seen as being in a hurry to hike policy rates as early as October, preferring to wait until December when it will have more data and new projections. Credit Agricole has raised its forecast for the ECB's peak deposit rate to 3% in March 2027, while UBS separately expects EUR/USD to recover to $1.16 by end-2026 and $1.20 by June 2027, provided European risks become less damaging than investors fear.

The principal headwind for EUR/USD today is French fiscal stress. France has become the focal point of European sovereign risk, and although the 10-year OAT-Bund spread has partially retraced after widening to around 140 basis points in early October 2026, upcoming elections and the absence of a credible French fiscal consolidation plan are likely to keep spreads volatile. The OAT-Bund spread stood near 125.8 basis points on Tuesday after approaching 159 basis points last week; yet this is not catharsis, as France still combines a deficit of 5.4% of GDP, debt near 120%, and planned issuance of EUR 340 billion for 2027. The National Assembly votes on the budget on 20 and 27 October, and any resort to Article 49.3 or a failed vote could widen spreads sharply and weigh further on EUR.

EUR/USD itself is trading near 1.1226, consolidating within the recent 1.1113-1.1230 range. EUR/USD is down about 4% this year and about 8% from its January high of 1.2081, having fallen to a 17-month low of 1.1113 on 14 October, as the Fed's September rate hike, hot US inflation, and French fiscal stress outweighed two ECB rate hikes. The rate differential remains a structural drag: the Fed raised its target range to 3.75-4.00% on 16 September, and with the ECB deposit rate at 2.50%, the Fed's upper bound sits 150 basis points above the ECB's deposit rate. Treasurers with direct EUR/USD exposures should note that the pair faces a binary risk event next week: a hold from the ECB on 29 October is almost fully priced, but any hawkish surprise or shift in guidance could provide a short-term EUR lift, while a deterioration in French spread dynamics or a surprise Fed hike on 28 October would likely push the pair back toward 1.1100.

US Backdrop:

The FOMC blackout period began on Saturday 17 October and runs until Thursday 29 October, meaning any last signals from the Fed had to come before that date. Markets currently price an 88-89% probability that the Fed maintains its rate at the 28 October meeting. Markets believe the FOMC holds rates steady in October, but firmly expect a hike to come in December; the real question, assuming no surprise hike, will be what markets can glean about early 2027. The US 10-year yield sits near 5.1%, keeping pressure on equity valuations, while weak US housing data (starts -5.2% month-on-month) has pulled the dollar and yields modestly lower. The absence of Fed speakers and the lack of tier-one US data today leaves the dollar in a holding pattern ahead of next week's crowded event calendar.

Technical Picture:

GBP/USD: Resistance at 1.3400 (Tuesday high, psychological), then 1.3430 and 1.3475. Support at 1.3340 (200-period moving average area per ActionForex), then 1.3320 and 1.3250.
GBP/EUR: Resistance at 1.1930 (current session high), then 1.1960 and 1.2000. Support at 1.1880 (Tuesday close), then 1.1840 and 1.1800.
EUR/USD: Resistance at 1.1230 (recent range top), then 1.1270 and 1.1320. Support at 1.1180 (intraday), then 1.1113 (14 October low, 17-month trough).
Outlook: GBP/USD is capped at 1.3400 pending confirmation that today's CPI print translates into sustained gilt yield support; EUR/USD remains biased lower within its recent range while French OAT spreads stay elevated and the Fed-ECB rate gap persists, with 1.1113 the key downside reference should risk sentiment deteriorate into next week's event cluster.

Today's Calendar:

Governor Bailey's remarks are the key event of the afternoon: any explicit endorsement of the November hike case would likely push GBP/USD above 1.3400, while a cautious or data-dependent tone could see the pair retrace toward 1.3320.

Outlook:

GBP/USD bias is modestly constructive on the back of today's CPI beat and near-certain BoE hike pricing, but the pair is unlikely to break decisively above 1.3400 before next week's Budget and FOMC events clarify the fiscal and rate trajectory; treasurers with USD payables should consider using any approach toward 1.3400-1.3430 as a layered hedging opportunity. EUR/USD remains the most vulnerable of the three pairs to a negative surprise: a deterioration in French budget negotiations, a hawkish FOMC statement on 28 October, or any ECB communication that falls short of market expectations on 29 October could combine to push the pair back toward the 1.1113 October low, and corporates with EUR receivables should review downside protection accordingly.

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.