GBP, EUR and USD outlook as dollar strength builds. Explore the impact of UK wage growth, US yields above 5%, oil above $107 and upcoming Fed and BoE decisions on FX markets.
Key Highlight
- Sterling wage growth remains elevated
UK wage growth surprised to the upside this morning, while the previous month was also revised higher. This suggests the recent cooling in wage pressures may be losing momentum, which could complicate the Bank of England’s path ahead. However, Wednesday’s CPI figures remain the most important UK release before Thursday’s BoE decision.
- Dollar supported by rising yields and oil
US 10-year Treasury yields moved above 5% overnight, reaching levels not seen for almost two decades. With oil trading above $107, renewed inflation concerns are strengthening expectations of further Federal Reserve tightening and providing support for the US dollar.
- Markets turn more positive on the dollar
The dollar extended Monday’s gains across the G10 despite markets pricing a more hawkish outlook for both the BoE and ECB. Options markets are also showing a clear shift in sentiment, with one month dollar risk reversals turning positive for the first time since early September.
Market Recap
The US dollar has taken centre stage as markets focus on inflation, interest rates and the growing risk that central banks may need to maintain tighter policy for longer.
US 10-year yields first moved above 5% yesterday and continued higher overnight, while oil remained above $107. Higher energy prices could add further inflationary pressure and reinforce expectations for another Fed rate increase.
Sterling and the euro both weakened against the dollar, despite markets now pricing five additional BoE hikes and four ECB hikes over the next 12 months. The dollar’s broader strength has outweighed the potential support from higher European interest rate expectations.
UK wage data provided some support for sterling this morning, but the stronger than expected figures were not significant enough on their own to materially change expectations for Thursday’s BoE decision.
Market Overview
Euro vs Dollar
Near term: cautious downside
EUR/USD has continued to move lower and is approaching an important support area. A sustained break below this level could reinforce the recent bearish trend.
The dollar is also receiving support from the options market, where one month risk reversals have moved in favour of dollar calls for the first time since early September. Wednesday’s expected Fed hike is largely priced in, meaning the focus will be on Chair Warsh’s comments and whether he signals further increases could follow.
Medium term: cautiously positive for the euro, but with risks on both sides
The ECB is currently being priced as one of the most aggressive tightening central banks in the G7. Comments from Nagel suggest rates may need to rise sufficiently to slow economic activity, while Barclays expects another ECB hike in December.
However, markets are also pricing two further Fed hikes across the remainder of 2026, which could provide continued support for the dollar. At the same time, dollar hedging by pension funds and insurers has fallen to just 41%, its lowest level since 2015, creating a potential source of future dollar demand.
What this could mean for a €250,000 transfer:
A move towards resistance could save a dollar buyer approximately $250, while a move towards support could increase the cost by approximately $700. The impact would be reversed for someone selling dollars.
Pound vs Dollar
Near term: broadly sideways with a slight downside bias
GBP/USD has edged lower and is testing its recent support area. The stronger UK wage figures provide some support for sterling, but the expected Fed hike remains the dominant influence this week.
The BoE is expected to hold rates on Thursday. While this may provide some downside protection for sterling, a hold alone is unlikely to generate significant upward momentum.
Medium term: broadly sideways with potential for modest sterling strength
Markets are currently pricing further BoE tightening through 2027, although some analysts believe these expectations may be too aggressive. Governor Bailey has previously pushed back against the need for immediate additional tightening.
Sterling could therefore remain sensitive to incoming UK inflation and labour market data as markets assess whether further rate increases are genuinely required.
What this could mean for a £250,000 transfer:
A move towards resistance could reduce the cost for a dollar buyer by approximately £375, while a move towards support could increase the cost by around £300. The reverse would apply to someone selling dollars.
Pound vs Euro
Near term: cautiously positive, but resistance remains
GBP/EUR has remained broadly unchanged overnight, with movements largely reflecting wider dollar developments rather than a significant sterling specific shift.
The stronger UK wage figures provide some modest support, although sterling remains below its recent resistance level. Meanwhile, ECB policymakers Kazaks and Simkus have maintained a hawkish tone.
Medium term: broadly sideways with a modest downside risk
The relative pace of BoE and ECB tightening will remain important for GBP/EUR. ECB President Lagarde has described a September rate increase as a “no brainer”, highlighting the continued focus on inflation within the eurozone.
If UK wage pressure remains stronger than expected and the recent cooling trend stalls, this could provide sterling with greater support over time.
What could mean for a £250,000 transfer:
A move towards resistance could reduce the cost for a euro buyer by approximately £525, while a move towards support could increase the cost by approximately £1,175. The opposite would apply to someone selling euros.
Bottom Line
The stronger UK wage figures are an important development, but Wednesday’s CPI release remains the key piece of UK data before Thursday’s BoE decision.
For now, the dollar remains firmly in control. Oil above $107, US 10-year yields above 5% and increasingly bullish dollar positioning are all supporting the US currency, even as markets price further tightening from both the BoE and ECB.
The next major catalyst will be the Federal Reserve decision and, crucially, Chair Warsh’s guidance on the potential path for rates beyond this week. Sterling will then face its own test when the BoE announces its decision on Thursday.
15th September 2026
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