GBP, EUR & USD Outlook: US Inflation, UK Growth and Market Volatility

Key Highlight

• US inflation was softer than expected, with core PCE rising 3.0% year on year, compared with the 3.3% forecast. This reduced expectations of an October Federal Reserve rate hike, with markets now placing around 81% odds on a December move.
• UK economic growth was revised higher to 0.5% in Q2, supported by stronger exports and business investment. The revision helped sterling strengthen against both the dollar and euro, although rising gilt yields remain a concern.
• The euro has come under renewed pressure. It fell to a 16-month low against the dollar and its weakest level against sterling since late July as concerns about France's public finances spread across European markets.
• US bond yields are adding support to the dollar. The 10-year Treasury yield briefly moved above 5.3%, its highest level since 2002, highlighting the continued influence of the bond market on currency movements.

Market Recap

The latest US inflation figures initially provided some relief for markets, with core PCE coming in below expectations at 3.0%. However, stronger consumer spending, which increased 0.6%, alongside firmer services inflation excluding housing, showed that parts of the US economy remain resilient.

Federal Reserve expectations have consequently shifted towards December, with around 81% of the market pricing a rate hike at that meeting. New York Fed President Williams also indicated that there is currently “no urgency to act.”

In the UK, second quarter economic growth was revised up to 0.5%, with exports and business investment providing the main support. Government spending, however, declined.

Despite the softer US inflation data, the dollar regained ground as US 10 year yields briefly exceeded 5.3%. At the same time, concerns surrounding France's public finances have increased pressure on the euro.

Market Overview

Currency markets remain highly sensitive to movements in government bond yields and changing expectations for central bank interest rates.

The dollar has regained momentum following its brief pause, supported by rising US Treasury yields and expectations that the Federal Reserve could still raise rates in December. The move above 5.3% for the US 10 year yield, its highest level since 2002, demonstrates how influential bond markets remain for the dollar.

Sterling has benefited from the UK's stronger growth figures and remains supported by expectations of further Bank of England action. However, the 30 year gilt yield reaching 6%, its highest level since 1998, highlights the financial market pressure surrounding the UK ahead of the 28 October Budget.

The euro remains under pressure, with concerns about French public finances weighing on sentiment. The difference between French and German borrowing costs is now at its widest since 2012, adding to concerns about the outlook for the single currency.

For businesses and individuals with upcoming currency requirements, volatility could remain elevated. The cost of hedging exposure to sterling and the euro for a single day has risen to its highest level since late July, with markets also preparing for the latest US payrolls data.

EUR/USD

The euro is currently at its lowest level of the year against the dollar. The dollar retains a rate advantage of around 146 basis points, while concerns surrounding French finances are adding further pressure.

However, softer US inflation and stronger inflation readings from Germany, France and Italy could provide some support for the euro if markets begin to reassess the interest rate outlook.

For a €250,000 transaction, a move towards resistance could mean approximately $5,600 more for a dollar buyer, with the reverse applying to a dollar seller.

GBP/USD

Sterling has surrendered some of its recent gains against the dollar as US yields have risen. The 30 year UK gilt yield reaching 6% has also added pressure to the pound ahead of the Budget.

Markets currently see the Federal Reserve and Bank of England at broadly similar levels for their next meetings. Further US rate expectations and stronger American growth could therefore continue to support the dollar.

For a £250,000 transaction, a move towards resistance could provide approximately $1,650 more for a dollar buyer, while a move towards support could result in approximately $850 less. The reverse applies to dollar sellers.

GBP/EUR

Sterling is currently at its strongest level against the euro since late July, although much of the move reflects weakness in the euro rather than significant sterling strength.

The pound retains an interest rate advantage of around 144 basis points, while markets are pricing around 90% probability of a November Bank of England rate hike. However, concerns around the UK Budget and continued positioning for sterling weakness mean the outlook remains finely balanced.

For a £250,000 transaction, a move towards resistance could provide approximately €2,200 more for a euro buyer, while a move towards support could mean approximately €1,000 less. The reverse applies to euro sellers.

With the 28 October Budget and US payrolls both capable of moving markets, exchange rates could remain particularly sensitive in the days ahead.

1st October 2026

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