Euro Drops vs Pound on French Budget Risks, Rate Outlook

Key Moments

Euro Under Pressure as EUR/GBP Extends Losing Streak

The Euro continued to weaken against the British Pound on Thursday, as political and fiscal uncertainties in France weighed on the single currency. EUR/GBP struggled to attract fresh buying interest and remained soft for a tenth consecutive session. At the time of writing, the pair was trading near 0.8470, holding just above Wednesday’s year-to-date low at 0.8447.

Analysts at ING commented that “EUR/GBP has been dragged lower by developments in France and the extra risk premium being built into the Euro.” They also pointed to the shifting policy backdrop in the United Kingdom, noting that “sterling could start to receive some support from Bank of England policy should it look like the BoE is ready to fall in with other central banks and hike rates,” underscoring the prospect that rate expectations in the UK could tilt momentum further in favor of the Pound.

Bank of England Officials Emphasize Inflation Fight

Remarks from Bank of England officials reinforced the market’s focus on inflation and the potential for further policy tightening. BoE Chief Economist Huw Pill stated on Thursday, “We need to ensure monetary policy is resolutely focused on inflation pressure.”

Policymaker Megan Greene highlighted wage dynamics as a concern, saying, “Early indications are that UK wages will grow around 3.5% next year, which worries me.” She further cautioned, “I do think the UK will see some 2nd round effects from current inflation.”

Reflecting these concerns, money markets were pricing in more than an 80% chance of a BoE rate increase in November, according to Reuters. Two 25-basis-point hikes were fully factored in by February, reinforcing support for the Pound through higher expected yields.

ECB Policymakers Split on Inflation Risks

On the Eurozone side, European Central Bank officials delivered mixed messages on the inflation outlook. Bank of Greece Governor Yannis Stournaras said on Thursday, “Inflation expectations well anchored around 2%,” and added, “I don’t see important second-round effects.” His comments suggested confidence that inflation pressures remain contained.

By contrast, Bank of Slovenia Governor Primož Dolenc struck a more hawkish tone, stating, “Persistently elevated inflation supports the case for moving policy rates towards a more restrictive territory.” He also argued, “Inflation risks skewed to the upside on oil, gas, food, strong growth.”

A Reuters survey released on Thursday showed broad expectations for policy stability in the near term. Out of 73 economists, 70 anticipated that the ECB would leave its deposit rate unchanged at 2.50% on October 29. However, 64 of 73 respondents projected a 25-basis-point rate increase in December.

Technical View: ING Flags Key Support Levels for EUR/GBP

From a technical perspective, ING analysts observed that EUR/GBP has experienced “quite a sharp drop … over the last couple of weeks.” They identified the “0.8455/65” band as “strong support,” suggesting that this area could act as a key level in the near term.

ING expected this support zone to be tested if the BoE appears poised to raise rates in November. They also pointed to an “outside risk to the 0.8400 area, while the French budgetary position remains unresolved,” indicating that continued fiscal uncertainty in France could keep the Euro under additional pressure.

Pound Sterling Performance Against Major Currencies

The following table shows the percentage change of the British Pound against major currencies today. The British Pound registered its strongest performance against the Australian Dollar.

The heat map illustrates cross-currency moves, with the base currency listed in the left-hand column and the quote currency across the top row. For instance, selecting the British Pound on the left and moving to the US Dollar column shows the performance of GBP (base) against USD (quote).