Pound Surges as Euro Buckles Under French Debt Stress
The pound-to-euro exchange rate has extended its gains into Friday, reaching its highest level in two and a half months. The pound outperformed other currencies this week, including the Swissie, as French bond market tensions hit the euro.
The euro's slide is driven by three factors: the correlation with 2y spreads, volatility in oil prices, and tensions in French debt markets. As a result, the euro-to-dollar rate fell to 1.1215 on Thursday, its weakest level since May 2025, and trades at 1.1253.
The widening gap between French and German ten-year borrowing costs has also contributed to the euro's decline. The Bank of England is expected to hike interest rates in November, which may support the pound against the euro.
Société Générale notes that evidence of second-round inflation effects can be seen in Spain and France, with French services inflation accelerating to 2.2% in September. A hot print on eurozone flash inflation for September would revive ECB hike bets and offer some support to the euro.