GBP/USD, EUR/USD and FX market outlook: discover how rising US bond yields, Fed rate expectations and inflation could affect currency markets and international payments.
Key Highlight
- US yields surge: The global bond selloff pushed US 10-year yields to 4.78%, their highest level since January 2025, as higher oil prices and renewed US Iran tensions increased inflation concerns.
- Fed expectations shift: Hawkish comments from Fed Chair Warsh have increased expectations of a September rate hike. Strong US ISM Manufacturing and JOLTS data at 15:00 could reinforce the case for rates remaining higher for longer.
- Euro faces pressure: Eurozone inflation is expected to accelerate to around 3.3%, while EURUSD remains the weakest performing G10 currency overnight as the dollar benefits from higher yields.
Market Recap
Markets have continued to reassess the outlook for US interest rates following Fed Chair Warsh's hawkish comments at Jackson Hole. His suggestion that inflation remains too high and financial conditions are not restrictive enough has pushed the probability of a September rate hike from around one in three to above 50%.
The move has been strengthened by a sharp global bond selloff. US 10-year yields reached 4.78%, their highest level since January 2025. Rising oil prices, driven by renewed US Iran tensions, are adding to inflation concerns and supporting expectations that the Federal Reserve may need to keep interest rates higher for longer.
This environment is providing broad support for the US dollar. Sterling has weakened against the dollar, although its performance against most other G10 currencies has been stronger, suggesting the recent GBP weakness is largely driven by dollar strength rather than a specific deterioration in the UK outlook.
The yen has remained relatively stable after US Treasury Secretary Bessent and Japan's Finance Minister Katayama emphasized the importance of orderly yen movements at the G20. This has helped limit further yen weakness despite Japanese government bond yields reaching a 30 year high near 3%.
The Norwegian krone remains the strongest performing G10 currency so far this year, while the New Zealand dollar is under pressure ahead of Wednesday's RBNZ decision.
Market Overview
Pound vs Dollar
Near term: 45% conviction, sideways to modestly lower.
Sterling's current weakness appears predominantly dollar driven. The key risk is that continued strength in US data and rising Treasury yields provide further support for the dollar.
The Bank of England remains cautious ahead of its 17 September meeting. Governor Bailey's comments regarding second round inflation effects suggest the Bank may not be in a rush to tighten policy, limiting the potential for sterling gains.
Medium term: 45% conviction, range bound.
Sterling has a strong technical support area where its 50, 100 and 200 day moving averages have converged. However, the Federal Reserve's interest rate outlook remains the dominant influence on GBPUSD, particularly following Warsh's hawkish comments and the latest rise in US yields.
What could this mean for you: If GBPUSD reaches resistance, a £250,000 dollar purchase would cost approximately £3,660 less. A move down to support would increase the cost by approximately £6,180.
Euro vs Dollar
Near term: 45% conviction, sideways to modestly lower.
EURUSD remains under pressure following the global bond selloff and currently lacks a strong domestic catalyst to counter broader dollar strength.
Eurozone inflation is expected to rise to around 3.3%, which could strengthen expectations of further ECB tightening if the data comes in above expectations. German inflation and eurozone confidence figures are therefore important near-term indicators.
Medium term: 45% conviction, modest euro upside with two way risks.
The ECB's potential tightening path remains a source of support for the euro. However, weaker eurozone growth could limit how far rates can rise. The Fed's increasingly hawkish outlook remains the main headwind.
What could this mean for you: If EURUSD reaches resistance, a €250,000 purchase would cost approximately $1,235 less. A move down to support would increase the cost by approximately $1,140.
Pound vs Euro
Near term: 40% conviction, sideways with modest downside risk.
GBPEUR is trading just below a level where selling interest has repeatedly emerged. The 17 September BoE decision remains the key event for sterling, while Bailey's cautious tone has increased expectations that the Bank could be closer to pausing than the ECB.
Medium term: 40% conviction, modest sterling upside but capped.
The July high remains an important target for sterling, although the market has so far struggled to break through this established resistance. The ECB's tightening outlook remains an important factor influencing the direction of GBP against the euro.
What could this mean for you: If GBPEUR reaches resistance, a €250,000 purchase would cost approximately £415 less. A move down to support would increase the cost by approximately £1,690.
GBPJPY has remained broadly stable, with comments from US and Japanese officials helping to limit further yen weakness despite Japanese bond yields reaching their highest level in around 30 years.
What to Watch Today
The main focus is on the 15:00 US data releases, particularly ISM Manufacturing and JOLTS job openings. Strong figures would reinforce expectations that US interest rates may remain higher for longer, potentially providing further support for the dollar.
European markets will also be watching eurozone inflation, with an expected increase to around 3.3%. A stronger than expected reading could increase expectations of further ECB tightening and provide some support for the euro.
Bottom Line
The global bond selloff has strengthened the hawkish shift in expectations for US interest rates and is currently favouring the dollar. The next major test comes from the 15:00 US economic data, where strong ISM and JOLTS figures could extend dollar strength.
For businesses with upcoming international payments, the current environment highlights the importance of monitoring key resistance and support levels rather than relying solely on headline exchange rates.
1st September 2026
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