Euro gains ground against British Pound despite French debt risks

EUR/GBP rebounds to around 0.8485 in Thursday’s early European session.
The UK faces a challenging fiscal picture, weighing on the British Pound.
Traders are worried France’s fragile public finances risk spilling over to the rest of Europe.

The EUR/GBP cross recovers some lost ground to near 0.8485, snapping the nine-day losing streak during the early European trading hours on Thursday. The British Pound (GBP) edges lower against the Euro (EUR) amid UK fiscal risks. Traders will closely monitor Finance Minister John Healey’s first budget on October 28.

After the UK’s long-term borrowing costs reached their highest level since the 1990s last week, the focus remains firmly on Healey’s first budget later this month. Finance Minister is expected to raise taxes to restore some of his fiscal room for manoeuvre which has been eroded by the global surge in borrowing costs caused by the ‌Iran war, per Reuters.

“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.

On the Euro’s front, the risk premium on French government debt climbed to its highest level since the Eurozone debt crisis as traders dump French bonds in favor of safer German bunds. French Prime Minister Sébastien Lecornu’s minority government announced plans last month for a €54bn savings drive to stave off a catastrophic downgrade or sovereign default.

Worries about France’s ability to rein in its budget deficit and a sharp bond market selloff last week elevated fears of a potential sovereign debt crisis in the Eurozone. This, in turn, could drag the EUR lower in the near term.

France budget path narrows as political risk premium persists into 2027

Analysts at Nomura highlight that France’s proposed budget, which aims to cut the deficit from an expected “5.4% of GDP this year to 5.0% in 2027,” faces a difficult political backdrop. They describe this as a “fairly modest reduction” that nonetheless “looks challenging amid political and public resistance to further belt-tightening.”

On the political front, Nomura notes that “recent comments from Marine Le Pen suggest her party is likely to be open to amending this year’s budget, rather than blocking it,” but they “believe there are risks that France Insoumise will vote it down.” In their view, opposition parties more broadly “could ultimately decide against voting in favour of Lecornu’s budget, requiring it to be passed by force (Article 49.3), as happened last year.”

Nomura sees “routes for PM Lecornu to secure budget passage, potentially through opposition party compromises or Article 49.3,” yet cautions that “even a successful passage of the budget is unlikely to remove the political risk premium from France.” They add that “we expect headlines surrounding the 2027 elections to also increase investor caution,” with France’s political risk premium “unlikely to remove” ahead of that vote.

Lane flags energy and fiscal uncertainty but keeps Euro outlook broadly steady

Lane’s 5.4/10 FXS Speechtracker score is almost unchanged from the 5.5/10 historic average, pointing to a broadly steady policy tone. Emphasis on the inflation implications of the energy shock leans mildly hawkish, but the admission that pass-through to the wider economy remains uncertain tempers any strong tightening bias.

Forward guidance that fiscal support will fade after 2026 suggests less growth tailwind, which is modestly dovish for the Euro over the medium term. The positive nod to AI supporting the economy offsets some downside risks, leaving the Euro reaction finely balanced and focused on incoming energy and inflation data rather than a clear policy shift.

Technical Analysis: Negative outlook of EUR/GBP remains intact

In the daily chart, EUR/GBP extends its slide below key trend markers and keeping the near-term bias bearish. The pair is capped by the 100-day simple moving average (SMA) and the Bollinger Bands’ 20-day middle SMA, underscoring a downside-skewed structure after the recent break lower. The 14-day Relative Strength Index around 30 hovers near oversold territory, which hints that while bears remain in control, the pace of the decline could start to moderate rather than accelerate aggressively.

On the downside, immediate support emerges at the lower Bollinger Band near 0.8465, where sellers may begin to book profits if the oversold readings deepen. On the topside, any rebound would first face resistance at the 20-day Bollinger middle band at 0.8550, followed by the 100-day SMA at 0.8575, before a more substantial barrier at the upper Bollinger band around 0.8635 comes into view.