Pound-to-Euro Hits 16-Month Best, EUR Vulnerability Keeps GBP Strong

Modified: Wednesday, 7 October 2026 20:46 BST - Written by James Fuller

STORY LINK Pound-to-Euro Hits 16-Month Best, EUR Vulnerability Keeps GBP Strong

The Pound to Euro (GBP/EUR) exchange rate extended its advance on Wednesday as persistent concerns over French fiscal policy continued to undermine the single currency.

GBP/EUR climbed above 1.18 and briefly approached 1.1840, its strongest level in around 16 months, before giving back part of the advance.

The Euro has remained the weaker side of the pair, with investors concerned over France's fiscal outlook, political uncertainty and the potential implications for European Central Bank policy.

French bonds did recover modestly after National Rally presidential candidate Marine Le Pen outlined a more restrictive fiscal programme.

Le Pen pledged to restore a primary budget balance within 18 months of taking power and reduce the overall budget deficit to below 3% of GDP by 2030.

Her plans include around €140bn of net spending reductions by 2032.

The proposals provided some relief for French government bonds, but the improvement proved limited and Euro sentiment remained fragile.

According to ING, there is still scope for further short-term Euro losses; "A retest of the mid-July lows around 0.846 appears the most likely near-term move, and we suspect EUR/GBP may reach 0.840 before clear support emerges."

EUR/GBP at 0.846 is equivalent to GBP/EUR around 1.1820, while 0.840 would imply a move close to 1.19.

BoE Hike Expectations Continue to Support Sterling

Sterling has also benefited from expectations that the Bank of England could raise rates at its November meeting.

MPC member Catherine Mann warned that inflation had become more embedded following a series of supply shocks.

She argued that risks to inflation remain tilted to the upside and stressed the importance of acting early if necessary, while noting that policy could subsequently be reversed if conditions changed.

Markets currently assign around an 80% probability to a November BoE rate increase.

There is therefore limited room for further Sterling support purely from a rise in near-term hike expectations.

ING also considers the broader UK rate curve too aggressive; "Markets currently price 21bp for next month, 36bp by year-end and 89bp by June. Although the risk of a November move has risen materially, the broader Sonia curve still looks far too hawkishly priced in our view."

The bank is nevertheless doubtful that a repricing of BoE expectations will immediately weaken the Pound.

ING commented; "Translating that into a EUR/GBP rally remains challenging. Elevated oil prices should keep downward pressure on repricing in the Sonia curve, while the euro continues to face significant domestic headwinds."

Comments from Bank of England Governor Andrew Bailey, chief economist Huw Pill and MPC member Megan Greene will be watched closely on Thursday for further guidance on the November meeting.

French Fiscal Risks Continue to Weigh on Euro

The Euro remains under pressure from both fiscal concerns and a reduction in expectations for further ECB tightening.

ING commented; "The euro started the week at the bottom of the G10 scorecard, a clear signal that turbulence in the French bond market remains firmly on FX investors' radars."

The bank added; "The euro is being affected through two channels: a direct one, where a fiscal risk premium (so far not extreme) has been added, and an indirect one via a repricing lower in ECB rate expectations."

The spread between French and German 10-year bond yields narrowed towards 125 basis points following Le Pen's fiscal announcement, but remained at historically elevated levels.

French central bank governor Emmanuel Moulin also rejected calls for the ECB to intervene directly in the French bond market, arguing that current conditions do not justify such action.

For GBP/EUR, the 1.1820 area highlighted by ING has now effectively been tested.

A sustained move above this level would increase the potential for a challenge of 1.19.

On the downside, 1.1750-1.1780 should provide initial support, while a break back below 1.1700 would indicate that Sterling's recent advance is losing momentum.

For now, the combination of French fiscal uncertainty and elevated UK rate expectations continues to favour the Pound.

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TAGS: Pound Euro Forecasts