GBP/USD, GBP/EUR & EUR/USD: Oil, France and Fed Rates Drive FX Markets

Key Highlight

• Oil and geopolitics are weighing on sterling. Oil moved above $102 a barrel as attacks on tankers in the Strait of Hormuz intensified. With the UK heavily reliant on imported energy, markets are increasingly concerned about the impact on inflation and economic growth. Sterling fell 0.5% against the dollar.
• Sterling remains strong against the euro. Despite the pressure from higher energy prices, the pound reached its strongest level against the euro in 16 months, helped by renewed concerns over France’s public finances.
• The dollar gained support from the Fed. Minutes from the Federal Reserve’s September meeting showed unanimous support for the rate increase, while some policymakers argued that further rate rises may be needed to bring inflation under control. This pushed the dollar towards its strongest levels of the year.
• US borrowing costs remain elevated. The US 10-year yield briefly reached its highest level since 2002, although strong demand at a government bond auction subsequently brought yields lower.

Market Recap

Markets remain focused on three key themes: higher oil prices, political and fiscal uncertainty in Europe, and the outlook for US interest rates.

In the UK, government borrowing costs increased as the rise in oil prices renewed concerns that inflation could remain higher for longer. This creates a difficult position for the Bank of England. Higher energy prices could strengthen the case for another rate increase in November, but the resulting pressure on households and businesses could also weaken economic growth.

France remains a major source of uncertainty for the euro. The gap between French and German borrowing costs widened again, while ECB policymaker Moulin indicated that the conditions for central bank intervention in French bond markets have not yet been met. This continues to weigh on the euro.

In the US, the latest Federal Reserve minutes reinforced expectations that interest rates could remain higher for longer. Markets are currently pricing an approximately 80% probability of a December rate increase. However, strong demand at the latest US government bond auction provided some relief after the sharp rise in Treasury yields.

Market Overview

Sterling and the dollar

Oil prices are increasingly important for sterling. Because the UK imports a significant proportion of its energy, a sustained rise in oil prices can push inflation higher while simultaneously putting pressure on economic growth.

That combination contributed to sterling's 0.5% decline against the dollar, while the US currency also benefited from safe haven demand and expectations that the Federal Reserve may continue tightening policy.

For the Bank of England, the situation is complicated. Higher energy costs could increase the pressure for another rate increase, but a weaker economy limits how aggressively the Bank can respond.

The euro remains under pressure

France continues to be the euro's main weakness. Rising French borrowing costs and the lack of an immediate signal that the ECB will intervene have left the single currency vulnerable.

This has helped sterling reach its strongest level against the euro in 16 months, even though the pound itself is facing pressure from higher oil prices and the UK's economic outlook.

The Fed continues to support the dollar

The Federal Reserve minutes strengthened the case for a higher US interest rate path. Every official supported September's rate increase, while some policymakers argued that additional tightening may be necessary to bring inflation under control.

Markets continue to price an approximately 80% chance of another increase in December, keeping the prospect of higher US rates supportive of the dollar.

Attention now turns to Fed Governor Waller and the latest US jobless claims for further clues about the direction of monetary policy.

Euro vs Dollar

Near term: 60% conviction, downside risk

The euro remains close to its 17-month low against the dollar, with French fiscal concerns and the widening gap between French and German borrowing costs continuing to weigh on the currency.

The dollar also retains a significant interest rate advantage of around 146 basis points, while market positioning remains heavily tilted towards further euro weakness. Given the speed of the recent decline, however, a short-term recovery cannot be ruled out.

Medium term: 70% conviction, continued weakness

The outlook remains negative for the euro. Markets expect US rates to remain elevated and potentially rise further, while ECB tightening is expected to be more limited. A credible resolution to France's budget situation would be the biggest risk to this view.

What this means for you: If the pair moves back towards the nearest reference level, a dollar buyer purchasing €250,000 would receive approximately $1,900 more. If the pair falls towards the next reference level, they would receive approximately $2,600 less. The reverse applies to dollar sellers.

Pound vs Dollar

Near term: 70% conviction, downside risk

Sterling has come under pressure from the rise in oil prices and the associated concerns over UK inflation and borrowing costs. At the same time, US borrowing costs remain close to their highest levels since 2002, supporting the dollar.

Medium term: 60% conviction, further downside risk

Interest rate expectations currently offer relatively little advantage to either currency, with both the Bank of England and Federal Reserve expected to raise rates by broadly similar amounts over the coming year.

The UK's exposure to the energy shock and the 28 October Budget therefore remain the key risks for sterling.

What this means for you: If GBP/USD reaches resistance, a dollar buyer purchasing £250,000 would receive approximately $1,250 more. If the pair falls towards support, they would receive approximately $5,125 less. The reverse applies to dollar sellers.

Pound vs Euro

Near term: 70% conviction, higher

Sterling reached its strongest level against the euro in 16 months, although this move has been driven largely by weakness in the euro rather than broad-based sterling strength.

Markets continue to price an approximately 85% probability of a November Bank of England rate increase. Following such a strong move, some consolidation would be unsurprising, particularly with higher oil prices creating a headwind for the pound.

Medium term: 70% conviction, higher

The outlook has been upgraded from 60% as interest rate expectations have increasingly favoured sterling. Markets are pricing more Bank of England tightening than ECB tightening over the next six months.

The main risk remains the UK's 28 October Budget, when markets will have a closer look at the government's fiscal position.

What this means for you: If GBP/EUR falls back towards support, a euro buyer purchasing £250,000 would receive approximately €2,250 less. With the pair already close to its highest level in 16 months, there is currently no reliable upside target. The reverse applies to euro sellers.

Bottom Line

The currency market is being pulled in two different directions for sterling.

Oil is weighing on the pound against the dollar, while France's fiscal problems are helping sterling against the euro. For dollar buyers, the recent sterling weakness may provide an opportunity to convert into stages rather than chasing the market.

For euro buyers using sterling, current levels are close to the best exchange rates seen in 16 months. With the UK Budget approaching on the 28th October, securing part of a requirement now could help reduce exposure to a potentially volatile market.

8th October 2026

How We Can Help...

Our team are here to help you get more from your money when making international payments. We will work with you to understand your payment needs and offer guidance on the best options available to you.

Get in Touch!

P: 07441 910 897

E: FX-Admin@frank-exchange.com

This document has been prepared solely for information and is not intended as an Inducement concerning the purchase or sale of any financial instrument. By its nature market analysis represents the personal view of the author and no warranty can be, or is, offered as to the accuracy of any such analysis, or that predictions provided in any such analysis will prove to be correct. Should you rely on any analysis, information, or report provided as part of the Service it does so entirely at its own risk, and Frank eXchange Limited accepts no responsibility or liability for any loss or damage you may suffer as a result.  Information and opinions have been obtained from sources believed to be reliable, but no representation is made as to their accuracy. No copy of this document can be taken without prior written permission.