Sterling strong against the Euro while the dollar gains on everything else

Daily Market View | By David Stritch, Senior FX Analyst, Caxton | 1 October 2026

Why is sterling strong against the euro while the dollar gains on everything else?

Sterling is trading near 1.17 against the euro on 1 October because markets have scaled back bets on another European Central Bank (ECB) rate rise. The US dollar is firm against most major currencies, supported by Iran-related safe-haven demand and a Federal Reserve that is still raising rates. Oil has eased from last week's highs, at least for now.

Key takeaways

• GBP/EUR opened at 1.1702 on 1 October, as traders pared back expectations of an ECB rate hike in October.
• The dollar remains in demand as a safe haven while US-Iran talks stall, and the Federal Reserve has left the door open to another rise.
• Japan's Finance Minister, Satsuki Katayama, has stepped up her warnings about the weak yen, with USD/JPY around 157.
• Friday's US Nonfarm Payrolls report is the week's big risk event for the dollar.

What happened in currency markets this week?

The euro has lost ground because the case for another ECB rate rise has weakened. ECB President Christine Lagarde said recently that the rise in bond yields since September's meeting would weigh on growth and restrain inflation. Markets took that as a sign the ECB may not need to do as much itself.

By 28 September, the market-implied chance of an October hike had dropped below 40%, the lowest since the ECB raised rates on 10 September. The euro slipped to around 1.1357 against the dollar on that news, and it opened today at 1.1297.

Sterling benefited by comparison. GBP/EUR opened at 1.1702 this morning. Against the dollar the picture is different: GBP/USD opened at 1.3266, as the dollar stays firm against almost everything.

Here are this morning's opening rates (1 October):

Why is the dollar so strong right now?

The dollar is benefiting from two sources of support at once: safe-haven demand and higher US interest rates.

On safety, the tension around Iran has not gone away. US-Iran talks have stalled, and on 30 September President Trump denied reports that he would offer sanctions relief in exchange for nuclear concessions. When geopolitical risk rises, investors tend to move into dollars, and that has held firm.

On rates, the Federal Reserve raised its target range to 3.75%-4.00% on 16 September. Markets see roughly even odds of another rise at the 27-28 October meeting. Higher US rates make dollar deposits and assets more attractive to hold.

Oil adds a further layer. Prices surged last month, with Brent recording its biggest monthly gain since July, but crude has come off its 24 September highs. That easing has taken some heat out of markets for now, though the underlying risk around Iran and the Strait of Hormuz remains.

Why is Japan warning about the yen?

Tokyo is worried that the yen has weakened too far, too fast. Finance Minister Katayama has said an undervalued yen is a problem, and after a call with US Treasury Secretary Scott Bessent she said Japan would keep in close contact with Washington to make sure currency markets stay orderly.

That language matters. Japanese officials have previously stepped in to buy yen when these warnings didn't work, and joint messaging with the US Treasury gives the threat more weight. With USD/JPY around 157 and GBP/JPY at 208.71, anyone with yen exposure should be aware that a sudden move in either direction is possible.

What is the market watching next?

The US jobs report on Friday 2 October is the key event. Nonfarm Payrolls, the monthly count of jobs added outside the farming sector, is expected to show around 90,000 new jobs for September, down from 162,000 in August. The unemployment rate is forecast to hold at 4.1%.

A strong figure would support the case for an October Fed hike and could push the dollar higher still. A weak one could take some of the shine off the dollar and give sterling room against it. Either way, expect volatility around 1:30pm UK time.

In Europe, the focus remains on what ECB policymakers say ahead of their October meeting. Any sign that they still favour another rise could quickly support the euro.

What does this mean for businesses and individuals with currency exposure?

The current mix creates different opportunities depending on which way your money flows.

• Paying suppliers in euros: GBP/EUR at 1.17 is a stronger rate than many importers have budgeted for. A forward contract, which fixes an exchange rate today for a payment due later, can protect that rate against a rebound in the euro.
• Paying in dollars: with the dollar strong across the board, sterling buys fewer dollars. Spreading purchases over time, or setting a target rate, can reduce the risk of buying everything at one point.
• Receiving dollar revenue: a firm dollar works in your favour when converting back to pounds. It could be worth considering whether to secure part of that value now.
• Holding yen or with Japanese exposure: the risk of intervention means the yen could move sharply with little warning.

David's view

My read is that sterling's strength against the euro is as much about the euro's weakness as anything happening in the UK. The market has moved quickly from expecting a busy ECB to doubting it will act in October, and that can reverse just as quickly. The dollar is in a stronger position for now: it has both higher rates and safe-haven demand behind it. The quieter oil market is welcome, but I wouldn't take it as a sign that geopolitical risk has gone away. For anyone with a large euro payment coming up, these levels deserve a close look.

Frequently asked questions

Why has the pound risen against the euro?
Mainly because the euro has weakened. Markets have reduced their expectations of another ECB rate rise after President Lagarde suggested higher bond yields are already doing some of the work, which makes the euro less attractive.

Why is the US dollar strong in October 2026?
The dollar is supported by safe-haven demand linked to tension around Iran and by a Federal Reserve that is still raising rates. Both tend to draw money into dollar assets.

Will Japan intervene to support the yen?
Nobody can say for certain. Finance Minister Katayama has stepped up her warnings and is coordinating with the US Treasury, which markets read as a sign that intervention is possible if the yen keeps falling.

How could the US jobs report affect exchange rates?
A strong Nonfarm Payrolls figure could raise the odds of an October Fed hike and lift the dollar. A weak figure could do the opposite, potentially helping GBP/USD.

How can a business protect itself from exchange rate moves?
Common tools include forward contracts to fix a rate for a future payment and rate alerts to act when a target level is reached. The right approach depends on the size and timing of your currency needs.

Talk to us about your currency exposure

If you have euro payments to make, dollar revenue to bring home or wealth held across currencies, now is a good time to review your plan. Speak to Caxton's FX dealers about how forward contracts and rate alerts could help you manage the risk around this week's moves.

This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.