Euro slips against British Pound on France’s fiscal concerns, central bank signals

• The Euro edges lower against the British Pound as France’s political and budget concerns weigh.
• Markets price in more than an 80% chance of a BoE rate hike in November.
• Most economists surveyed by Reuters expect the ECB to hold rates this month.

EUR/GBP struggles to attract buyers and edges lower on Thursday, remaining on the back foot for a tenth consecutive day as France’s political and budget concerns keep the Euro (EUR) under pressure against major currencies. Traders also assess central bank remarks from both sides of the Channel. At the time of writing, the cross trades around 0.8470, hovering above the year-to-date low of 0.8447 touched on Wednesday.

Analysts at ING note that “EUR/GBP has been dragged lower by developments in France and the extra risk premium being built into the Euro.” At the same time, they argue that “sterling could start to receive some support from Bank of England policy should it look like the BoE is ready to fall in with other central banks and hike rates,” highlighting the potential for UK rate expectations to shift the balance further in favour of the Pound.

BoE Chief Economist Huw Pill said on Thursday, “We need to ensure monetary policy is resolutely focused on inflation pressure.” Meanwhile, policymaker Megan Greene said, “Early indications are that UK wages will grow around 3.5% next year, which worries me.” She also warned, “I do think the UK will see some 2nd round effects from current inflation.”

Money markets price in more than an 80% chance that the BoE will raise interest rates in November, with two 25-basis-point increases fully priced in by February, according to Reuters.

On the European side, European Central Bank (ECB) policymakers offer differing views on inflation risks. Bank of Greece Governor Yannis Stournaras said on Thursday, “Inflation expectations well anchored around 2%,” adding, “I don't see important second-round effects.” Meanwhile, Bank of Slovenia Governor Primož Dolenc said, “Persistently elevated inflation supports the case for moving policy rates towards a more restrictive territory.” He added, “Inflation risks skewed to the upside on oil, gas, food, strong growth.”

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.

On the technical front, analysts at ING note that EUR/GBP has suffered “quite a sharp drop … over the last couple of weeks,” identifying “0.8455/65” as “strong support.” They expect this zone to be tested if the BoE appears ready to hike in November, with an “outside risk to the 0.8400 area, while the French budgetary position remains unresolved.”