Euro hits fresh yearly low against British Pound as French fiscal concerns weigh

• EUR/GBP falls to a fresh year-to-date low as French political and fiscal concerns weigh on the Euro.
• The British Pound finds support from growing expectations of a Bank of England rate hike.
• Traders await UK GDP and Eurozone inflation data for fresh clues on the monetary policy outlook.

EUR/GBP remains on the defensive on Monday, sliding to a fresh year-to-date low of 0.8445 as French political and fiscal concerns keep the Euro (EUR) under sustained pressure. At the time of writing, the cross trades around 0.8450, down 0.17% on the day.

France aims to bring its budget deficit down to 5% of GDP in 2027, with parliamentary debate on the plans expected to begin this week. However, securing support for large spending cuts could prove difficult in a divided parliament. With public debt approaching 119% of GDP, markets fear that failure to pass the measures could deepen concerns about France’s finances.

French fiscal concerns and the broader global bond sell-off have pushed French government bond yields higher, while the spread over Germany remains near multi-year highs. The resulting pressure on financing costs could weigh on Eurozone growth. Against this backdrop, the European Central Bank (ECB) faces a difficult balance between bringing inflation under control and protecting growth, as higher energy costs linked to the Middle East war keep price pressures elevated.

A Reuters poll published on Thursday shows that 70 of 73 economists expect the ECB to hold its deposit rate at 2.50% on October 29, while 64 of 73 anticipate a 25-basis-point hike in December.

Analysts at MUFG note that “negative developments in the euro zone have boosted the relative appeal of the pound,” reinforcing recent gains in EUR/GBP. They add that media reports suggest the Labour government is “well aware of challenging global bond market conditions ahead of this month’s budget scheduled for 28th October,” which is “encouraging them to play it safe as they seek to limit the risk of negative market reaction.” MUFG argues that such fiscal caution would be “a development that would help to ease downside risks for the pound.”

The British Pound (GBP) also benefits from growing bets on a Bank of England (BoE) rate hike before year-end after six consecutive holds, as higher energy costs keep inflation sticky above the central bank’s 2% target.

On the data front, Germany releases its final September inflation figures on Tuesday, followed by the UK’s August Gross Domestic Product (GDP) report on Thursday. The final Eurozone inflation reading for September is due on Friday. These releases, alongside comments from ECB and BoE officials throughout the week, could offer further clues on the outlook for interest rates on both sides.