The Euro (EUR) stabilized against its major rivals during the European session on Thursday after experiencing significant losses earlier in the week, particularly against the Canadian Dollar and the US Dollar [1]. The EUR/USD pair lost more than 0.5% on Wednesday, approaching a 17-month low near 1.1160, while EUR/JPY fell 0.6% and EUR/GBP closed its ninth consecutive day in negative territory before recovering slightly on Thursday to near 0.8485, snapping its losing streak [1][2].
The recovery in EUR/GBP was attributed to the British Pound (GBP) weakening amid UK fiscal risks, with traders focusing on Finance Minister John Healey's upcoming budget on October 28. The UK's long-term borrowing costs recently reached their highest level since the 1990s, and the budget is expected to include tax increases to restore fiscal flexibility, which could negatively impact growth and investment, according to Dominic Bunning, head of G10 FX strategy at Nomura [2].
On the Eurozone front, the risk premium on French government debt climbed to its highest level since the Eurozone debt crisis as investors sold French bonds in favor of safer German bunds. The French government, led by Prime Minister Sébastien Lecornu, announced a €54 billion savings plan last month to avoid a downgrade or sovereign default. However, concerns remain about France's ability to reduce its budget deficit, which is projected to decrease from 5.4% of GDP in 2024 to 5.0% in 2027—a reduction Nomura analysts describe as 'fairly modest' and politically challenging [2]. Political uncertainty persists, with opposition parties potentially blocking the budget, possibly requiring passage by force under Article 49.3, as occurred last year. Nomura analysts caution that even successful budget passage is unlikely to remove France's political risk premium, which may persist through the 2027 elections [2].
Meanwhile, the widening French-German bond yield spreads and doubts over the European Central Bank's (ECB) ability to tighten policy have kept the Euro under bearish pressure [1]. Market participants are awaiting speeches from ECB and Bank of England policymakers, as well as the release of the ECB's September meeting minutes and key US economic data, including Initial Jobless Claims and Wholesale Inventories [1]. The Federal Reserve's September meeting minutes indicated that most policymakers see another rate hike as likely by year-end, with a focus on upside inflation risks and a resilient economy [1].
Analysts at Commerzbank noted that recent developments in the expected interest rate differential between the Euro area and the US have been 'somewhat supportive of the Euro,' though the overall sentiment remains cautious [1].
CONCLUSION
The Euro's recent stabilization comes amid heightened political and fiscal risks in both France and the UK, with market participants closely monitoring upcoming central bank communications and fiscal policy developments. While the EUR/GBP pair has recovered slightly, ongoing concerns about French debt and UK fiscal tightening continue to weigh on sentiment. The market impact is medium, with investors remaining cautious as political and economic uncertainties persist.