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Pound sterling hovers just below the year's highs as euro tipped to remain under pressure.
The pound-to-euro exchange rate is knocking on the door that guards the way to 2026's highs, as markets remain wary of a major ECB policy shift in response to worries about French debt costs.
The pair rises to 1.18 in Wednesday trade, where it meets a psychologically significant line of selling interest that guards the peaks near 1.1820.
A close above 1.18 would be a first technical requirement for confirmation that a higher base is forming, which would prove a staging board for a push deeper into the 1.18s in the near-term.
The euro leg of the pair is in charge as French debt costs - here measured via the yield on government bonds (OATs) - have surged, and the concern is the European Central Bank (ECB) will need to adopt a more cautious approach to raising interest rates in the coming months.
It might also engage mechanisms designed to limit the rise in a Eurozone country's bond yields. This proactivism is judged to be 'dovish' for the euro in its ability to limit yield ascent.
The takeaway? The ECB can prevent an unruly market, but in doing so it suppresses the euro.
"We expect EUR to remain under near-term pressure as markets navigate key October dates and the Moody’s ratings review. While renewed fiscal concerns have weighed on EUR, the reaction remains relatively tame compared with the last episode of comparable OAT-Bunds widening. We therefore see scope for near-term EUR underperformance," says Jayati Bharadwaj, Head of FX Strategy at TD Securities.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistWhile still under pressure, the euro has managed to keep itself above some key lines in the market: Euro-dollar holds above and euro-pound holds above 0.8450, the July low.
"The EUR also managed to defend key trendline support levels vs GBP and CHF, while the OAT-Bund spread has retraced slightly from the +150bp peak," says Bharadwaj.
For euro buyers selling sterling, a period of uncertainty and anxiety pertaining to France and the ECB reaction function should be enough to keep the euro under pressure and push EUR/GBP below 0.8450 and GBP/EUR north of
"The pound was among the key beneficiaries from the widening in French spreads last week," says a weekly FX market note from Barclays. "For the moment, French developments are likely to remain the primary driver for EURGBP".
