GBP • EUR • USD | Week commencing 12 October 2026

This week, currency markets are focused on three key themes: the upcoming UK Budget, concerns over French public finances and the outlook for US interest rates. With inflation and government borrowing costs remaining in focus, fresh economic data could trigger further volatility across the major currencies.

🇬🇧 GBP — Sterling Faces a Budget Test

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What happened last week?

Sterling remained caught between inflation concerns and growing anxiety about the UK's public finances.

Government borrowing reached £18.3 billion in August, above expectations, while UK government bond yields climbed to elevated levels. Rising borrowing costs have added pressure on the Chancellor ahead of the 28 October Budget, with markets watching for potential tax increases and measures to restore confidence in the public finances.

Higher yields can sometimes support sterling by making UK assets more attractive. However, when yields rise because investors are concerned about government debt, the effect can be negative, as borrowing becomes more expensive and confidence weakens.

Inflation is complicating matters further. Higher energy prices could make it harder for the Bank of England to ease monetary policy, even if economic growth and employment weaken.

What to watch this week

• UK economic data: Activity figures will help investors assess whether the economy is losing momentum.
• Budget speculation: Markets will look for clues about possible tax increases, spending decisions and plans to restore fiscal headroom.
• Gilt yields and Bank of England commentary: Further increases in borrowing costs could add to concerns about the UK's finances, while hawkish comments on inflation could influence interest-rate expectations.

FX outlook

Sterling's direction will depend on whether investors focus more on the prospect of higher interest rates or on the risks surrounding public borrowing and the upcoming Budget.

A credible fiscal plan could help restore confidence. Conversely, further pressure on government bond yields or concerns about the impact of taxation on growth could weigh on the pound.

For businesses: Companies with upcoming GBP/EUR or GBP/USD payments should be aware that Budget headlines and economic releases could create sharp movements in exchange rates.

🇪🇺 EUR — French Debt Weighs on the Euro

What happened last week?

The euro remained under pressure as investors questioned France's ability to bring its budget deficit under control.

France's proposed budget aims to reduce the deficit through spending cuts and additional revenue. However, political divisions have raised doubts about whether the measures will pass in full.

The gap between French and German government bond yields has widened, reflecting increased concern about French fiscal stability. Investors generally view German government bonds as a benchmark for eurozone borrowing costs, so a widening spread signals that France is facing greater scrutiny.

The euro has also struggled against a relatively strong US dollar, as investors continue to assess the outlook for interest rates on both sides of the Atlantic.

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What to watch this week

• French budget negotiations: Investors will look for signs that the government can secure support for its deficit-reduction plans.
• French-German bond spreads: Further widening could signal renewed concerns about French debt and weigh on the euro.
• Eurozone economic data and ECB commentary: Markets will assess whether inflation pressures justify tighter policy, particularly as higher energy costs threaten economic activity.

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FX outlook

The euro faces a difficult combination of domestic fiscal uncertainty and competition from a relatively strong US dollar.

A credible French budget agreement could help stabilise sentiment. However, further political disruption or widening bond spreads could leave the euro vulnerable, particularly against sterling if UK Budget concerns ease.

🇺🇸 USD — Inflation Puts the Fed in Focus

US inflation could determine the dollar's next move

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What happened last week?

The US dollar remained relatively firm as markets weighed signs of a weakening labour market against persistent inflation risks.

The September jobs report showed that the US added just 29,000 jobs, while unemployment rose to 4.2%. The weaker figures prompted investors to reassess the outlook for Federal Reserve policy and the likelihood of further interest-rate increases.

Normally, weaker employment data can put pressure on a currency by increasing expectations of rate cuts. However, the dollar has continued to find support from demand for safe-haven assets, elevated Treasury yields and uncertainty surrounding the global economic outlook.

The Fed faces a difficult balancing act: keeping inflation under control without placing excessive pressure on employment and economic growth.

What to watch this week

• US inflation on Wednesday, 14 October: September's Consumer Price Index (CPI) is the key release. A stronger reading could reinforce expectations of tighter monetary policy, while softer inflation could support expectations of lower rates.
• Retail sales and producer prices on Thursday, 15 October: These figures should provide further insight into consumer demand and inflation pressures.
• Federal Reserve commentary: Investors will look for clues about whether policymakers believe further tightening is necessary or whether weaker employment warrants a more cautious approach.

FX outlook

The dollar enters the week with a supportive backdrop, but the inflation report could determine whether its recent strength continues.

Hotter-than-expected inflation could strengthen the dollar by increasing expectations of higher US interest rates. Softer inflation, particularly alongside weaker consumer spending, could encourage investors to reduce those expectations and take profits on recent dollar gains.

For businesses: Companies purchasing US dollars should pay particular attention to Wednesday's CPI release. A surprise in either direction could quickly affect the cost of upcoming USD payments.

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What We're Watching This Week

🇬🇧 GBP — The UK Budget and borrowing costs

UK economic activity, government bond yields and further clues about the government's fiscal plans.

🇪🇺 EUR — French debt and political uncertainty

Whether France can reassure bond investors and reduce pressure on the euro.

🇺🇸 USD — US inflation and the Fed

The inflation report, further economic releases and expectations for future interest rates.

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Overall Outlook

The week ahead is likely to be shaped by UK fiscal uncertainty, French debt concerns and the US inflation outlook.

Sterling has the potential to benefit from euro weakness, but the upcoming UK Budget remains a significant domestic risk. The euro needs greater confidence in France's public finances to establish a more sustained recovery. Meanwhile, the dollar's direction will depend heavily on whether US inflation reinforces expectations of further Federal Reserve tightening.

Energy prices remain an important common factor. If they rise further, inflation could remain elevated across all three economies, complicating central bank decisions and increasing market volatility.

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