Sterling, Dollar and Euro Market Update

Key Highlight

• Oil and US yields continue to support the dollar. Brent crude moved towards $108 after President Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz. At the same time, US 10 year Treasury yields reached 5.23%, a multi year high, increasing support for the dollar.

• Central bank expectations are diverging. ECB President Christine Lagarde indicated that higher bond yields are already contributing to tighter financial conditions, reducing expectations of an October rate hike to below 40%. In contrast, the Bank of England remains open to further tightening, with markets pricing a November rate of 4.00%.

• Sterling faces increased Budget risk. The cost of hedging sterling over the next month has risen to its highest level since late July, with options positioning pointing towards greater sterling weakness around the 28 October Budget, particularly against the euro.

• The yen strengthened following intervention concerns. Japan's senior currency officials issued strong warnings about yen weakness and confirmed close coordination with US authorities. The yen subsequently became the strongest performing G10 currency of the day.

• The RBA raised rates again. Australia's central bank increased rates by 25 basis points to 4.60%, the highest level in 15 years. Despite the unanimous decision, the Australian dollar weakened after Governor Bullock confirmed that policymakers had considered leaving rates unchanged.

Market Recap

Markets remain focused on the combination of higher oil prices, rising bond yields and changing expectations for central bank policy.

The dollar continued to benefit from higher US yields and renewed expectations that the Federal Reserve may need to maintain tighter policy. Global equities also fell to one week lows as Brent crude approached $108, reinforcing concerns that higher energy costs could add to inflation.

Sterling performed relatively well against the dollar and strengthened against the euro. The Bank of England's Deputy Governor Ramsden said further rate increases remain possible if energy related inflation continues to build, with markets currently pricing a 4.00% Bank Rate for November.

The euro faced additional pressure from political uncertainty in France, with estimates suggesting this could reduce French economic growth by around 0.4 percentage points.

Meanwhile, Japan's authorities stepped up their warnings over yen weakness. Finance Minister Katayama described the yen's undervaluation as a concern and confirmed that Japan is coordinating with US officials to help maintain orderly markets.

Market Overview

The US dollar remains supported by the combination of oil prices and elevated US Treasury yields. With Brent close to $108 and the US 10-year yield at 5.23%, the market continues to favour the dollar despite uncertainty over the wider economic outlook.

Europe is presenting a different picture. Lagarde's comments suggest the ECB is becoming more comfortable allowing higher market yields to provide some of the tightening required, reducing the immediate likelihood of an October rate increase. This has helped narrow the euro's support against sterling.

For sterling, the Bank of England's willingness to consider further rate increases provides some support. However, the 28 October Budget remains a significant source of uncertainty, with options markets showing increased demand for protection against sterling weakness, particularly against the euro.

The immediate focus now turns to economic data, including US job openings, Core PCE inflation and Friday's payrolls, alongside upcoming UK data. These releases could influence expectations for both the Federal Reserve and Bank of England and, consequently, the direction of GBP and USD.

Euro vs Dollar

The dollar continues to benefit from elevated US yields and the prospect of tighter Federal Reserve policy, while the ECB's more cautious stance has reduced support for the euro.

US 10 year yields have reached 5.23%, while the ECB's October rate hike probability has fallen below 40%. Friday's eurozone inflation figure, expected at 3.7%, could provide an important test for the euro.

For businesses and individuals buying dollars, a stronger dollar can increase the sterling or euro cost of future payments. Conversely, those selling dollars could benefit if the dollar remains elevated.

Pound vs Dollar

Sterling is being supported by expectations that the Bank of England could continue raising rates, with markets pricing a 4.00% rate for November. However, the wider strength of the US dollar and uncertainty surrounding the October Budget continue to create pressure.

The US UK rate differential is relatively narrow at around 14 basis points, meaning upcoming economic data could have a significant influence on the pair.

For anyone with upcoming dollar payments, the combination of elevated US yields and Budget uncertainty makes the timing of currency requirements particularly important.

Pound vs Euro

The outlook for GBP/EUR has become more balanced.

The ECB's reduced likelihood of an October hike, now below 40%, contrasts with the Bank of England's willingness to consider further increases. This has provided some support for sterling and contributed to its recent gains against the euro.

However, sterling faces a significant event risk from the 28 October Budget, with options positioning indicating expectations of increased volatility and potential sterling weakness around the announcement.

For those buying euros, current levels should therefore be considered alongside the timing of any upcoming payments rather than relying solely on the short term direction of the market.

What This Means for You

The dollar remains supported by oil prices above $100 and US yields at multi year highs, while central bank expectations are creating greater divergence between the UK and eurozone.

For USD requirements, the current environment continues to favour careful consideration of forward cover and payment timing.

For EUR requirements, sterling has received some support from the contrasting positions of the BoE and ECB, but the October Budget creates an important risk point.

With several major data releases due this week, currency markets could remain volatile. If you have an upcoming international payment, it may be worth reviewing your requirements and available FX options rather than waiting for a specific market outcome.

29th September 2026

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