Image © Adobe Images
Sterling outperformed this week as French bond market tensions hit the euro, and Burnham's Europe pivot adds a tailwind.
The pound's advance against the euro has extended into Friday, and the forces behind it look set to persist into the October budget.
The pound-to-euro exchange rate trades at 1.1741, having touched 1.1756 overnight, its highest level in two and a half months.
"Sterling outperformed this week alongside the Swissie. EUR/GBP resumed its downward trajectory in place since last December, tumbling below 0.8520 to a 2 ½ month low," says a weekly review from Société Générale.
The 0.8520 level equates to 1.1737 in pound-to-euro terms, and the euro-to-pound low at 0.8506 equates to 1.1756, the pound's best level against the euro in two and a half months.
The euro is the worst-performing G10 currency this week, while the pound's losses against the dollar are limited to 0.2%, leaving the pound-to-dollar rate at 1.3209.
The move builds on Thursday's break above 1.17, which we flagged would need to stick to confirm a genuine sterling bid beyond month-end flows.
It has.
The euro's slide is driven by three forces working together: "the correlation with 2y spreads, the volatility in oil prices and tensions in French debt markets caused EUR/USD to cascade below vital support levels at 1.1325 and 1.1270," says Société Générale.
Above: GBP/EUR at daily intervals, extending its advance above 1.17.
The euro-to-dollar rate fell to 1.1215 on Thursday, its weakest level since May 2025, and trades at 1.1253.
French bonds are at the centre of it.
The gap between French and German ten-year borrowing costs blew out to 146 basis points overnight, while German debt rallied on a flight to quality.
"This is no longer merely a risk. The European market, particularly on the fixed-income side, has fragmented," says Natixis in its morning note.
Natixis says the question of ECB intervention is increasingly being raised, with activation of its Transmission Protection Instrument or a change to quantitative tightening becoming more feasible options, though probably not yet likely.
Above: The French ten-year government bond yield.
KBC notes that French, Italian and Belgian bond spreads against swaps all closed at their highs for the day, with France's at a record.
"We believe the topic could stay at the center of attention at least for the remainder of the year. That's bad news for the euro," says KBC.
The Belgian bank sees downside potential for the euro-to-dollar rate stretching to the 1.11 area, and adds: "Euro weakness is the name of the game, also against GBP."
The tightening in financial conditions has also eroded bets on European Central Bank hikes, with markets now pricing one fewer increase than a week ago.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialistBurnham's European Pivot
The UK side of the pair has its own driver.
Prime Minister Andy Burnham told the BBC it is "possible" a future Labour manifesto could include a referendum on rejoining the EU, saying the current relationship "isn't good enough."
He said a referendum "wouldn't be the right thing to do right now", and options range from the current arrangement to a closer relationship along the lines of the EU-Canada model or rejoining the customs union.
A UK-EU reset summit is planned for 20 November.
"If the UK government under PM Burnham is indeed warming towards a closer relationship with the EU and not ruling out a second referendum in the next Party manifesto, EUR/GBP would become attractive over the longer-term," says Société Générale.
An attractive euro-to-pound rate means a lower one, which points to further gains in the pound-to-euro rate beyond the current 1.1741.
Matthew Ryan, Head of Market Strategy at Ebury, says markets are greeting the pledge positively, seeing closer ties as a net positive for the pound after its crash following the 2016 vote.
"We don't expect this to provide any lasting support for GBP, however, as another referendum is both fanciful and, in our view, highly unlikely to see the light of day," says Ryan.
Ryan nevertheless expects the UK's recent solid economic performance to keep the pound "well bid relative to the euro."
That performance was confirmed on Wednesday when the ONS revised second-quarter growth up to 0.5%.
Bond Market Headwinds
The pound is not immune to the global selloff in government debt.
The UK 30-year gilt yield exceeded 6.0% on Thursday for the first time since 1998, before yields retreated later in the session.
Ryan warns that fresh selling in bonds could open more downside in the pound-to-dollar rate.
Against the euro, the pound's relative position is stronger: UK borrowing costs are rising alongside a Bank of England expected to hike in November, while French spreads reflect fiscal and political stress specific to the euro area.
Inflation and Payrolls
Two releases today will test the pound-to-euro rate's advance.
Eurozone flash inflation for September is expected at 3.7% for the headline and 2.5% for the core, with national figures from France, Germany, Italy and Spain all surprising to the upside this week.
Société Générale notes evidence of second-round inflation effects in Spain and France, with French services inflation accelerating to 2.2% in September.
A hot print would revive ECB hike bets and offer the euro some support.
US non-farm payrolls follow this afternoon, with consensus at 90,000 and Société Générale forecasting 120,000.
The euro-to-pound rate's break below 0.8520 equates to 1.1737 in the pound-to-euro rate, and holding above that level through today's data would confirm the pound's advance has moved beyond month-end flows and into a trend.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
