Sterling scales 16-month highs against euro as French fiscal concerns mount

Sterling Surges to 16-Month High Against Euro Amid French Fiscal Worries

Market Movements and Economic Drivers

Sterling's Performance Against Major Currencies

Oct 7 (Reuters) - Sterling scaled a 16-month high against the euro on Wednesday as France's fiscal concerns continued to weigh on the single currency, although the pound weakened against a broadly stronger dollar.

Euro's Decline and Contributing Factors

The euro fell 0.27% to 84.49 pence, its lowest level since June 2025, extending its losing streak to a ninth straight session. Against the dollar, the euro slumped 0.6% to 1.1199, weighed down by worries about France's fiscal position ahead of the 2027 presidential election.

Bond Market Turmoil and Central Bank Policies

Euro zone bond-market turmoil has also dampened expectations for further rate hikes from the European Central Bank, even as traders bet that the Bank of England will belatedly resume tightening policy to catch up with other central banks.

Bank of England and Market Expectations

Unlike the ECB and the US Federal Reserve, the Bank of England has kept interest rates unchanged since the outbreak of the Iran war, though markets now see an 81% chance of a rate increase at its November meeting, according to LSEG data.

Impact of Oil Prices and UK Gilt Yields

The pound weakened 0.3% to 1.3239 against a broadly firmer dollar as rising oil prices supported the greenback.

British 10-year borrowing costs rose sharply on the back of higher crude oil prices, with the 10-year gilt yield <GB10YT=RR > touching 5.44%.

Focus on UK Fiscal Policy

After the UK's long-term borrowing costs reached their highest level since the 1990s last week, the focus remains firmly on finance minister John Healey's first budget on October 28.

Expert Commentary on Fiscal Outlook

"It's going to be a budget which leans towards fiscal tightening and ultimately impacts growth," said Dominic Bunning, head of G10 FX strategy at Nomura. If it includes tax increases, such as a rise in capital gains tax, investment could suffer and that could weigh more on sterling's cyclical outlook than its structural one, he said. 

(Reporting by Medha Singh in Bengaluru, Editing by Xevi Fontdegloria)