– Written by
Frank Davies
STORY LINK Pound to Euro Today: GBP/EUR Rate Near 10-Week High as France Debt Fears Deepen
The Pound to Euro (GBP/EUR) exchange rate remained close to 10-week highs on Friday, with Sterling benefiting from even greater pressure on the Euro amid mounting concerns over French government finances.
GBP/EUR traded around 1.1730 after touching fresh highs earlier in the week, leaving the pair on course for its strongest weekly advance in several months.
There has been extreme volatility across bond markets, with investors focused on the implications of rapidly rising borrowing costs for governments, central banks and equity markets.
The UK 10-year gilt yield surged to 5.51% on Thursday, its highest level since 2007, while the 30-year yield briefly moved above 6% for the first time since 1998.
The bond sell-off also spilled over into equities.
Saxo UK investor strategist Neil Wilson commented; “This could be a significant moment for the market as the pressure build-up in the bond market is finally hitting equities.”
He added; “Selling in bonds is heavy across the board and the US 10yr has just taken out its highest since 2002 above 5.33%….there is carnage in the bond market which is hitting stocks hard.”
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Bond yields eased somewhat on Friday following weak US employment data and a sharp retreat in oil prices, but concerns over fiscal sustainability remain intense.
French Bond Stress Keeps Euro Exchange Rates under Pressure
Sterling remains vulnerable when bond and equity markets come under heavy pressure, but GBP/EUR has been supported by even greater concerns surrounding Euro-Zone sovereign debt.
French government bonds have come under particularly heavy selling pressure.
The spread between French and German 10-year yields widened towards 150 basis points on Friday, its widest level since the Euro-Zone debt crisis in 2012.
ING had commented; “the French OAT-German Bund spread widening so quickly to +127bp is quite an alarming move-potentially adding some risk premium into the euro as well as constraining the ECB’s tightening cycle.”
That spread has subsequently widened further.
France’s government has presented plans for €54bn of savings in its 2027 Budget as it attempts to reduce the deficit from 5.4% of GDP this year to 5.0%.
The measures include spending restraints and tax increases, but markets remain concerned over whether they can secure sufficient parliamentary support.
French debt is close to 119% of GDP, while political uncertainty ahead of next year’s presidential election has intensified investor unease.
The pressure has also spread into French equities and credit markets, raising fears that continued deterioration could eventually constrain the European Central Bank’s ability to tighten monetary policy further.
UK Manufacturing Inflation Pressures Return
The UK is facing its own difficult combination of high borrowing costs and renewed inflation pressures.
The final UK manufacturing PMI was recorded at 51.9 in September, slightly below the flash reading of 52.0 but above August’s 51.7.
Manufacturing activity therefore remained in expansion territory, although output growth slowed.
More importantly for the Bank of England, the survey recorded a renewed increase in inflation pressures as higher energy prices and supply-chain disruption pushed costs higher.
Rob Dobson, Director at S&P Global Market Intelligence commented; “A disappointing September PMI saw the rate of increase in UK manufacturing production slow further. Slower demand growth was to be expected given the higher energy prices seen during the month.”
He added; “The big shift in September was in the survey’s price measures, which switched from signalling a decline in inflationary pressures to a renewed uplift.”
The combination of higher inflation and fragile growth leaves the Bank of England facing another difficult policy decision.
Markets still expect further UK rate increases, but aggressively higher gilt yields also threaten household finances, government borrowing costs and economic activity.
For GBP/EUR, the immediate technical picture has nevertheless improved.
The 1.1700 area should provide initial support, while a sustained move above 1.1730-1.1750 would bring the 1.1800 region back into focus.
Pound Sterling’s advantage over the Euro will depend heavily on whether UK bond-market stress remains contained while fears surrounding France’s fiscal position continue to intensify.
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TAGS: Pound Euro Forecasts
