Pound Rises as French Debt Crisis Weighs on Euro

The Pound to Euro exchange rate (GBP/EUR) reached a 10-week high above 1.1750 as worries about French debt and Eurozone bond markets weakened the Euro. The Pound also gained from expectations of Bank of England rate hikes and improving UK-EU relations, though analysts caution that aggressive rate-hike pricing could later weigh on Sterling.

MUFG predicts the GBP/EUR exchange rate will stabilize short-term before falling to 1.1430 by Q3 2026. While Eurozone bond concerns persist, MUFG believes shifting Bank of England expectations will eventually undermine the Pound. The bank expects two BoE rate hikes but views four hikes as excessive, forecasting higher EUR/GBP in 2027.

French fiscal instability and doubts about ECB rate hikes further pressured the Euro. ING noted that French debt remains vulnerable, questioning the ECB's ability to proceed with aggressive tightening amidst bond market turbulence. Investors worry that any ECB intervention may involve minimal tightening or direct bond purchases, both of which would weaken the Euro.

Domestically, markets anticipate a Bank of England rate hike in November and four hikes over the next year, though this pricing is met with skepticism. Rabobank sees short-term GBP support but expects softening as rate hike expectations adjust. Meanwhile, Euro vulnerabilities from Eurozone growth headwinds and political uncertainties in France and Germany could limit EUR/GBP gains into 2027. Rabobank forecasts GBP/EUR at 1.15 over three months.

Fiscal policy will be crucial in the coming weeks. The UK budget on October 28 is expected to offer limited headroom, constraining Chancellor Jeremy Healey's options. MUFG suggests a credible budget could stabilize the Gilt market and support the Pound.