Euro extends decline against British Pound on France debt concerns

• The Euro remains under pressure as fiscal and political concerns deepen across Europe.
• A sharp sell-off in French government bonds revives fears of Eurozone fragmentation.
• Stronger-than-expected UK PMI figures provide additional support to the British Pound.

EUR/GBP extends its decline on Monday, sliding to its lowest level since mid-July as political turmoil and mounting concerns over Europe’s public finances weigh on the Euro (EUR). At the time of writing, the cross trades around 0.8478, down 0.24% on the day, after touching an intraday low of 0.8458.

Concerns centre on France, where high debt, a widening budget deficit and doubts over the government’s ability to pass its 2027 budget have triggered a sharp sell-off in government bonds. Adding to the political unease, Spanish Prime Minister Pedro Sánchez has called a snap election amid intensifying housing protests.

Analysts at MUFG note that the Euro has "continued to weaken at the start of this week" as "intensifying fears over the destabilizing financial conditions in the Eurozone" follow a "sharp sell-off in French government bonds." They highlight that the move has "encouraged a broad-based softening of the euro," with the single currency falling to "fresh year-to-date lows overnight against the US Dollar and Yen at 1.1161 and 176.41 respectively."

MUFG points out that "the yield spread over German Bunds has blown to just over 140bps, which is almost 60bps wider than before the summer," adding that "the increasingly rapid sell-off is adding to a sense of crisis in the French government bond market." According to the bank, these "unfavourable developments have triggered fears over the re-emergence of fragmentation risks in the Eurozone that could impede the transmission of monetary policy."

The European Central Bank’s (ECB) Transmission Protection Instrument allows the central bank to purchase bonds from individual Eurozone countries when an unwarranted and disorderly rise in borrowing costs threatens the smooth transmission of monetary policy. However, access depends on fiscal sustainability and compliance with broader European Union economic rules.

ECB Chief Economist Philip Lane said on Monday that “the rise in long-term rates will slow growth and reduce pass-through by more than projected.” Lane added that policymakers remain on a “middle path” and that a measured response is appropriate, while warning that a second wave of the energy supply shock poses upside risks to inflation and downside risks to growth.

On the data front, final Eurozone figures showed that the HCOB Composite PMI rose to 53.1 in September from 52.0, while the Services PMI climbed to 53.0 from 51.6. Meanwhile, the UK S&P Global Composite PMI was revised up to 52.0 from the preliminary estimate of 51.7, while the Services PMI came in at 52.1, also above the initial reading of 51.7.