GBP, EUR and USD Under Pressure: Oil, Interest Rates and the Outlook for FX Markets

Key Highlight

• UK borrowing costs surged, with 30-year gilt yields reaching 5.89%, their highest level since 1998.

• Markets are now pricing two Bank of England rate increases by February, although sterling has remained relatively resilient.

• The euro is facing pressure despite stronger inflation, as rising energy costs, political uncertainty and demand for the US dollar outweigh expectations of tighter ECB policy.

• The yen has weakened beyond 160 against the dollar, despite renewed warnings from Japanese officials over possible intervention.

Market Recap

UK government bonds came under significant pressure as markets reacted to renewed concerns around the UK’s fiscal position. The 10-year gilt yield climbed as much as 11 basis points to 5.25%, while the 30-year yield reached 5.89%, its highest level since 1998. Markets are now pricing two Bank of England rate increases by February. Sterling was only moderately affected, helped by comments from MPC member Mann highlighting continued wage and inflation risks.

Oil prices remained above $95 as tensions around the Strait of Hormuz continued to unsettle markets. Higher energy prices have contributed to a sharp rise in US Treasury yields, with the 10-year yield reaching 4.81%, its highest level since late 2023. Markets are now pricing roughly two thirds probability of a Federal Reserve rate increase on 16 September, supporting further US dollar strength.

Eurozone inflation accelerated to 3.3% in August, its highest level in almost three years. However, core inflation remained at 2.4%, indicating that much of the increase is driven by higher energy prices. While the data has made an ECB rate increase on 10 September highly likely, the euro has still weakened as investors favour the dollar amid geopolitical uncertainty and rising energy costs.

The Reserve Bank of New Zealand raised interest rates by 25 basis points to 2.75%, as expected, but softened its forward guidance. The move suggested that the rate hiking cycle may be approaching its conclusion, triggering a sharp decline in the New Zealand dollar.

The Japanese yen also came under renewed pressure, breaking above 160 against the US dollar despite warnings from Japan's Finance Minister and the Bank of Japan Governor that intervention remains a possibility.

Market Overview

Euro vs Dollar

Near term: 60% conviction, downside risk

The US dollar remains favoured in the near term as expectations of a Federal Reserve rate increase on 16 September have risen to around two thirds. The Euro’s higher inflation rate has failed to provide meaningful support, with rising energy costs and demand for safe haven assets continuing to favour the dollar.

Medium term: 50% conviction, cautious downside risk

The interest rate gap between the US and Eurozone remains an important driver. If the Federal Reserve raises rates while the ECB delivers its expected increase on 10 September, US rates will remain considerably higher. French political uncertainty could also add further pressure to the euro, particularly if wider bond spreads become a concern.

For businesses: If the euro reaches resistance, dollar buyers could pay approximately $1,425 less per €250,000, while sellers would be worse off by the same amount. A move towards support could increase the cost by approximately $2,325 per €250,000 for buyers, while benefiting sellers by the same amount.

Pound vs Dollar

Near term: 60% conviction, cautious downside risk

The recent selloff in UK government bonds has introduced additional uncertainty for sterling. This comes alongside rising US Treasury yields and increasing expectations of a Federal Reserve rate hike on 16 September. Although hawkish comments from MPC member Mann have offered some support to the pound, much of this is already reflected in market pricing.

Medium term: 50% conviction, sideways to lower

The UK currently holds only a relatively narrow interest rate advantage over the US. This could disappear if the Federal Reserve increases rates as markets expect. Persistently higher oil prices also create a challenge for the pound by increasing inflationary pressure and potentially encouraging the Federal Reserve to maintain higher rates for longer.

For businesses: A move towards resistance could reduce the cost for dollar buyers by approximately £1,800 per £250,000, while sellers would be worse off by the same amount. A move towards support could increase the cost by approximately £3,200 per £250,000 for buyers, while benefiting sellers by the same amount.

Pound vs Euro

Near term: 50% conviction, sideways

The ECB's expected rate increase on 10 September is the main near-term factor for this currency pair. A more hawkish ECB could narrow the UK's current interest rate advantage, although recent hawkish comments from the Bank of England provide some support for sterling.

Medium term: 50% conviction, cautious downside risk for GBP

The UK currently has an interest rate advantage of around 154 basis points over the Eurozone. An ECB rate increase would reduce this gap and could create some downside pressure for Sterling. However, political uncertainty in France could limit euro strength and provide some protection for GBP.

For businesses: If the pair reaches resistance, euro buyers could save approximately £2,025 per £250,000, while sellers would be worse off by the same amount. A move towards support could increase costs by approximately £1,225 per £250,000 for buyers, while benefiting sellers by the same amount.

What to Watch Today

Today's Bank of Canada interest rate decision and US ADP employment figures are likely to attract attention, but Friday's US payrolls report remains the key economic release of the week.

For sterling, markets will continue to assess the impact of rising UK borrowing costs and concerns around the government's fiscal position. For the euro, French political developments remain an important risk alongside the ECB's decision next week.

For businesses with upcoming international payments, the combination of higher oil prices, rising bond yields and shifting central bank expectations means currency markets remain particularly sensitive to economic and political headlines.

Bottom Line

Higher oil prices and rising US Treasury yields have extended the dollar's recent strength. With markets increasingly pricing a Federal Reserve rate increase this month, the US payrolls report on Friday could be particularly important for the next major move in GBP/USD and EUR/USD.

Sterling is also facing its own domestic challenges following the sharp rise in UK gilt yields, while the euro is being pulled in opposite directions by higher inflation and growing political and energy-related risks.

2nd September  2026

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