GBP/USD + GBP/EUR Market Update

Budget Countdown Caps GBP; Brent Eases from Six-Month Highs as FOMC, ECB and BoE Super-Week Begins, Monday, 26 October 2026

GBP/USD: 1.3348 | GBP/EUR: 1.1910 | EUR/USD: 1.1207

Sterling has drifted modestly lower from Friday's close, with GBP/USD falling to around 1.3367 on 26 October, down 0.08% from the previous session. Global markets have opened the week cautiously as oil retreated from six-month highs, but investors remained reluctant to add risk ahead of a heavy schedule of central bank decisions, macro data and major technology earnings; the temporary easing in crude prices has reduced the immediate pressure on inflation expectations, but it has not removed the broader macro problem. EUR/USD is holding near 1.1207, marginally firmer on the day, as markets position for Wednesday's twin event risk.

Overnight & Market Tone:

Brent crude fell to around $114.53/bbl on 26 October, down 1.87% from the previous day, with the decline attributed to reports that Qatari mediators were in Tehran on Sunday working to ease regional tensions; US crude futures dropped 1.9% to $101.29. The pullback follows a sharp 6.2% weekly gain in Brent, which had lifted futures to their highest weekly close since mid-2022. Wall Street struggled last week as rising oil prices broadened the selloff beyond the AI trade, with the Dow bearing the brunt and the S&P 500 and Nasdaq notching a second weekly loss. The FTSE 100 closed Friday at 10,690, down 0.32%, and futures point to a cautious open this morning. VIX closed Friday at 19.45, up 2.21%, reflecting heightened investor caution ahead of the Fed decision and earnings releases from major technology companies. The 10-year gilt yield is trading near 5.40%, having eased from its 8 October peak of 5.53% but remaining well above levels seen at the start of the year, keeping gilt-sterling dynamics firmly in focus ahead of Wednesday's Budget.

UK Data & Bank of England:

The domestic data calendar is light today, with markets instead focussed entirely on Wednesday's twin event: Chancellor John Healey will deliver his first Budget on Wednesday 28 October, the biggest indication yet of the priorities of the Burnham government and of how it intends to approach the public finances. Alongside the Budget, the government will publish the OBR's latest economic and fiscal forecasts, the first since the war in Iran led to rising global energy prices. The fiscal arithmetic is challenging: a Reuters poll of economists showed that Healey should rebuild headroom to about £15-16 billion to keep bond investors onside, with the median forecast showing headroom has halved since the March fiscal update to around £10-12 billion from £23.6 billion. A severe global bond selloff briefly pushed the 30-year gilt yield above 6% in October, eroding the fiscal buffer; economists estimate available headroom now ranges between roughly £8.5 billion and £16 billion, as higher borrowing costs increase the debt interest bill. Income tax, VAT and National Insurance rate rises have been ruled out, but speculation over other taxes is intensifying. For the BoE, the picture remains one of near-certain near-term tightening: as of 25 October, OIS pricing implies a 94% chance of a 25bp hike at the 5 November MPC meeting, with the MPC having held Bank Rate at 3.75% by 6 votes to 3 at its September meeting, with Megan Greene, Catherine Mann and Huw Pill voting for an immediate rise to 4%. The November meeting also publishes the Monetary Policy Report, giving the Committee an opportunity to update its inflation and growth projections in the context of both the Budget and elevated energy prices.

European Backdrop & EUR/USD:

For the ECB meeting on 29 October, market pricing implies a 97% probability of no change to the deposit rate at 2.50%, with the following monetary policy meetings scheduled for 17 December 2026 and 4 February 2027. The Governing Council's two-day meeting runs 28-29 October in Frankfurt, with the rate decision published on 29 October at 14:15 CET, followed by President Lagarde's press conference at 14:45 CET. The ECB's deposit rate has stood at 2.50% since 16 September, after a 25bp hike at that meeting, and the near-unanimous hold pricing reflects the tension between still-elevated euro area inflation and a growth backdrop that has softened materially, partly as a consequence of the energy shock from the Middle East conflict. The euro fell to 17-month lows near 1.1312 earlier in October due to stagflation pressures, widening European sovereign debt spreads, and capital flight to higher-yielding US assets, before recovering as some of those risk premia partially unwound. EUR/USD is trading near 1.1207 this morning, having recovered from those October lows but still some distance below the 1.1236 level seen on 22 October. The pair's near-term trajectory is likely to be determined by the sequencing of Wednesday's FOMC and Thursday's ECB: a confirmed Fed hold combined with a cautious Lagarde press conference that signals a prolonged pause would narrow the policy rate differential only modestly (the Fed's 3.75-4.00% target range sits 125-150bp above the ECB deposit rate), leaving EUR/USD vulnerable to further USD strength on any hawkish Fed surprise. Conversely, if Lagarde signals openness to a December hike, EUR/USD could recover towards 1.1250-1.1280. For treasurers with direct EUR/USD exposures, the 1.1180-1.1240 range has been the dominant trading band over the past fortnight; a clean break of either boundary on central bank event risk this week would carry technical significance.

US Backdrop:

As of 25 October, OIS pricing favours a Fed hold at the 28 October FOMC meeting, with only a 9.6% chance of a 25bp hike priced; over the next 12 months, markets price a net 65.5bp of additional tightening. The Fed raised rates by 25bp on 16 September, its first hike since July 2023; the minutes released on 7 October said "most participants" saw another increase as likely appropriate "by year end", but weak September payrolls have since shifted that expected hike from October towards the 9 December meeting. This is a non-SEP meeting, with no updated economic projections or dot plot released alongside the decision, meaning the statement language and Chair Warsh's press conference will carry outsized weight for USD direction. The USD has found modest support from the hold-then-hike narrative, with the dollar index holding firm as markets price December as the more likely vehicle for the next move.

Technical Picture:

GBP/USD: Resistance at 1.3376 (Friday's close), then 1.3408 (22 October four-week high) and 1.3430. Support at 1.3320, then 1.3280 and 1.3220 (early October low).
GBP/EUR: Resistance at 1.1945 (Friday's close) and 1.1960. Support at 1.1880, then 1.1840 and 1.1800.
EUR/USD: Resistance at 1.1240 (22 October high) and 1.1280. Support at 1.1180, then 1.1140 and 1.1100.
Outlook: GBP/USD remains capped below the 1.3408 four-week high pending Budget clarity, while EUR/USD is consolidating in a narrowing range ahead of the ECB; a break of 1.1180 on a hawkish FOMC surprise or a dovish Lagarde press conference would open a move towards 1.1100, whereas a hold-and-signal-December outcome from both central banks would likely see the pair drift back towards 1.1240-1.1260.

Today's Calendar:

The Euro area flash Q3 GDP print at 09.00am is the only market-moving release today; a materially weaker-than-expected reading would add to the ECB's growth dilemma and could weigh on EUR/USD ahead of Thursday's decision, while a resilient print would modestly support the case for a December ECB hike.

Outlook:

GBP faces a binary week: a fiscally credible Budget that preserves gilt market confidence could allow the BoE hike premium to reassert itself and push GBP/USD back towards 1.3400-1.3430, whereas a Budget that disappoints on headroom or triggers a gilt selloff would likely see sterling give back recent gains sharply, with 1.3280 the first meaningful support. For EUR/USD, the key risk is the sequencing of FOMC and ECB: treasurers with EUR payables should consider using any EUR/USD strength towards 1.1240 before Wednesday as an opportunity to add cover, given the asymmetric risk that a hold-and-signal-December FOMC outcome combined with a cautious ECB could push the pair back towards 1.1140-1.1180 by end of week.

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.