Euro Drops Against Pound on French Fiscal Concerns and BoE Rate Hike Hopes

The Euro (EUR) weakened against the British Pound (GBP) on Monday, with the EUR/GBP cross dropping to around 0.8475 during early European trading. The decline was driven by fiscal concerns in France, which sparked fears of contagion across the Eurozone following a sharp bond market rout. Analysts worry that France’s financial instability could echo the sovereign debt crisis of over a decade ago, potentially forcing the European Central Bank (ECB) to intervene to support French government debt.

Brent Donnelly, president of foreign exchange trading at Spectra Markets, noted that political tensions in France have intensified ahead of the April 2027 elections. He expressed skepticism about the credibility of any budget promises made by the current government, given the impending change in power. Meanwhile, Bank of England (BoE) policymaker Catherine Mann emphasized the need for a rate hike to manage inflationary risks, stating that financial conditions are still not tight enough. Markets are pricing in roughly 30 basis points of rate hikes by the BoE by the end of the year and approximately 90 basis points of cumulative tightening through 2027.

Analysts at Brown Brothers Harriman highlighted mounting fiscal risks in France, pointing out that the country’s minority government aims to reduce the budget deficit to 5.0% of GDP next year. However, they doubt the proposal will pass parliament without significant concessions. Even if a compromise is reached, France’s fiscal watchdog has warned that the 2027 draft budget assumptions are overly optimistic, raising concerns about the credibility of the deficit reduction plan. Against the backdrop of limited political appetite for compromise ahead of the 2027 presidential election, BBH suggests that a rollover of the 2026 budget is the most likely outcome, which could push the deficit to roughly 6.0% in 2027, further diverging from Eurozone commitments.

Technical analysis shows that EUR/GBP remains capped under key moving averages and Bollinger bands, maintaining a near-term bearish bias. The 100-day simple moving average and Bollinger midline sit well above the current level, suggesting the broader trend remains downward despite oversold conditions. Initial resistance is seen at the Bollinger lower band around 0.8500, with further barriers at the Bollinger midline near 0.8565 and the 100-day SMA at 0.8580. As long as EUR/GBP holds below this resistance cluster, rallies are expected to be corrective, with sellers likely to reassert control.