GBP/USD + GBP/EUR Market Update

Ceasefire Optimism Lifts Risk Appetite and Weakens the Dollar; All Eyes on FOMC (Wed) and BoE (Thu) as GBP Steadies, Monday, 27 July 2026

GBP/USD: 1.3337 | GBP/EUR: 1.1701 | EUR/USD: 1.1398

The dominant overnight theme is a sharp de-escalation in Middle East risk premia: Brent crude declined toward $90 per barrel on Monday after the US and Iran halted strikes against each other over the weekend amid efforts to revive diplomacy, with the US pausing its attacks late Friday and Tehran saying it had halted retaliatory strikes and engaged in talks with Oman regarding the Strait of Hormuz. That risk-on impulse has weighed on the dollar across the board, providing modest support to GBP/USD and EUR/USD at the open, though both pairs remain well below their mid-July highs as domestic headwinds persist. The week's dominant scheduled events are the FOMC decision on Wednesday evening and the BoE Monetary Policy Report on Thursday at noon.

Overnight & Market Tone:

GBP/USD builds on Friday's modest bounce from a three-week low, gaining follow-through traction at the start of the week and lifting above mid-1.3300s during the Asian session amid a broadly weaker US dollar. EUR/USD similarly builds on a bullish gap opening and climbs back above 1.1400 during the Asian session, the intraday move sponsored by a broadly weaker dollar weighed down by renewed optimism over a diplomatic resolution to the US-Iran conflict. Equities are constructive: the FTSE 100 closed Friday at 10,736, with European indices also firmer. The VIX closed at 18.58 on Friday, reflecting a market that remains cautious but is not in distress. Brent fell to around $90.28/bbl on Monday, down more than 8% on the day, though it remains some 22% higher over the past month. The sharp crude pullback eases near-term UK inflation fears and reduces the urgency for further BoE tightening, a mild negative for GBP carry.

UK Data & Bank of England:

The domestic data picture heading into Thursday's decision is mixed. Friday's flash PMIs beat expectations across the board, with manufacturing rising to 52.8 (consensus 52.1), services to 51.8 (consensus 49.4) and the composite to 52.1 (consensus 49.7); S&P Global noted hospitality was supported by favourable weather and the FIFA World Cup, while manufacturing outperformed on stronger exports. However, the survey was conducted between 9th and 22nd July and therefore did not capture the recent escalation in the Middle East, which pushed Brent crude back above $100/bbl before this weekend's pullback. On the monetary policy front, a Bloomberg poll of seven analysts (as of 25 July) unanimously expects the BoE to hold rates unchanged at 3.75%. At its June meeting, the MPC voted 7-2 to maintain Bank Rate at 3.75%, with two members voting to increase to 4%. The base case is a hold through summer with a hawkish bias; the tone of the MPC statement and the vote split are likely to matter more than the rate decision itself, with a hawkish hold featuring multiple dissents potentially pushing GBP higher, while a dovish signal could see sterling drift lower. Softer June CPI (2.6%) provides the MPC with more time to assess the impact of volatile energy prices, while PM Burnham's first policy announcements have left investors questioning how he will fund spending pledges, bringing fiscal worries back to the table. The gilt market was unsettled after Burnham suggested he would use "any flexibility" within the UK's fiscal rules, setting up tension ahead of the Autumn Budget. The 10-year gilt yield has been trading near 5.06% in recent sessions (Currency News UK), reflecting that dual fiscal and inflation risk premium. Thursday's Monetary Policy Report will also carry updated growth and inflation projections, which markets will scrutinise closely given the energy price volatility of recent weeks.

European Backdrop & EUR/USD:

The ECB voted on 23 July to leave its main interest rate unchanged at 2.25%, broadly in line with market expectations, but traders are already anticipating a rate hike in September as President Lagarde warned that renewed Middle East hostilities and the resultant rebound in oil prices pose upside risk to the eurozone inflation outlook. In the press conference, Lagarde said the bank anticipates inflation to remain "well above target" until the first half of 2027. Markets now see a 70% chance of a September rate hike, as the latest oil price surge following renewed US-Iran strikes has outweighed the relatively dovish tone struck at the meeting. ECB policymakers agreed to avoid providing guidance on the future path of interest rates following June's first rate hike since 2023, citing elevated economic uncertainty; officials stressed communication should remain neutral, neither signalling a series of further hikes nor suggesting the move was a one-off, reaffirming a data-dependent, meeting-by-meeting approach. On the data side, the first release of eurozone Q2 GDP is due this week and, according to the PMIs, is expected to show a "largely stagnant" outturn. In Q1 2026, eurozone GDP posted +0.3% quarter-on-quarter, after +0.2% in Q4 2025. A weak Q2 print would complicate the ECB's tightening narrative and could weigh on EUR. For EUR/USD specifically, the pair has recovered from last week's lows near 1.1362 and is trading back above 1.1398 this morning, aided by the dollar's broad retreat on ceasefire optimism. The pair sits near the middle of its four-week 1.1362-1.1461 range. The key tension for EUR/USD is that the ECB is now priced to hike in September (circa 70% probability per Trading Economics), while the Fed is expected to hold at its meeting this week but preserve the option to tighten further. The ECB's June 2026 projections suggest inflation returning to 2% only in 2028, after above-target inflation in 2026 and 2027, supporting the view that policy may need to remain mildly restrictive for longer than expected. If today's Brent decline proves durable, it marginally reduces the probability of an ECB September hike and could cap EUR/USD upside. Conversely, any re-escalation in the Middle East would likely push oil back above $100, reinforce ECB tightening expectations, and provide EUR with a modest bid. Treasurers with direct EUR/USD exposures should note that the pair's near-term direction is unusually sensitive to geopolitical headlines rather than scheduled data this week, with Thursday's eurozone flash CPI estimate (if released) the next hard data point of note.

US Backdrop:

At the FOMC's 28-29 July meeting, policymakers are expected to leave rates unchanged while preserving the option to tighten further if inflation proves persistent. Following the June FOMC meeting and hawkish remarks by Fed Chair Kevin Warsh, Bank of America changed its base case from steady rates to expecting a series of rate hikes in 2026. As of early July, futures markets were pricing a path that rises to about 3.8% by October 2026 and approaches 4% around year-end. Today's USD softness is driven by the geopolitical risk-off unwind rather than any shift in Fed pricing; buyers remain cautious, keeping a close eye on Middle East developments ahead of the Fed policy verdict this week. Chair Warsh's press conference on Wednesday evening is the single most important USD event of the week: any signal of a September hike would likely reverse today's dollar weakness sharply.

Technical Picture:

GBP/USD: Resistance at 1.3360 (Friday's intraday high), then 1.3400 and 1.3441 (last week's peak). Support at 1.3300 (psychological), 1.3253 (24 July close per MTFX data) and 1.3200.
GBP/EUR: Resistance at 1.1720 (23 July close), then 1.1738 (mid-July high). Support at 1.1680 and 1.1650 (OCBC's medium-term target zone near EUR/GBP 0.8570).
EUR/USD: Resistance at 1.1420 (last week's upper boundary), then 1.1461 (four-week range high). Support at 1.1362 (recent range low) and 1.1300.
Outlook: All three pairs are in consolidation mode ahead of the FOMC and BoE decisions; a hawkish Warsh press conference on Wednesday would likely push GBP/USD back toward 1.3253-1.3300 support and compress EUR/USD toward 1.1362, while a dovish surprise could see GBP/USD test 1.3400 and EUR/USD retest 1.1461.

Today's Calendar:

Today's domestic calendar is thin, leaving GBP, EUR, and USD direction almost entirely in the hands of geopolitical headlines and positioning ahead of Wednesday's FOMC; treasurers should treat any sustained move above 1.3360 in GBP/USD or above 1.1420 in EUR/USD as a potential opportunity to address near-term USD payables before Wednesday's volatility window opens.

Outlook:

The near-term bias for GBP/USD is cautiously constructive on a ceasefire-driven dollar retreat, but the pair remains capped by domestic fiscal uncertainty under PM Burnham and the risk that a hawkish Warsh press conference on Wednesday reverses today's gains; GBP/EUR is similarly range-bound, with the BoE hold and ECB September hike pricing broadly offsetting each other near 1.1700. The key risk scenario for all three pairs this week is a Warsh press conference that explicitly signals a September Fed hike, which would strengthen the dollar materially, push GBP/USD below 1.3300, and potentially compress EUR/USD back toward the lower end of its recent range at 1.1362.

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions.