Euro extends losing streak against British Pound, hits 16-month low

The Euro has hit a 16-month low against the British Pound, marking the continuation of its recent losing streak. Concerns over France's fiscal health have been weighing heavily on the Euro, with investors questioning the government's ability to curb its budget deficit. Prime Minister Sebastien Lecornu has set a target to reduce the deficit from 5.4% of Gross Domestic Product this year to 5% in 2027, but political resistance may hinder the passage of the budget.

This uncertainty, coupled with a broader decline in global bonds, has pushed French borrowing costs to new heights. The Bank of France Governor has described the situation as "complicated" and highlighted the "serious" state of the country's economy, though it is not yet at crisis levels. The turmoil in Eurozone bond markets may limit the European Central Bank's ability to aggressively raise interest rates.

In contrast, the British Pound has been performing relatively stronger against most major currencies, indicating that the EUR/GBP decline is primarily due to broader Euro weakness. Sterling is also under pressure from concerns about the UK's fiscal outlook ahead of its October budget. Rabobank notes that both the UK Prime Minister and Chancellor have assured adherence to former Chancellor Reeves' fiscal rules, suggesting taxes may need to be raised again.

This tax increase is viewed as neither beneficial for growth nor well-received by voters. The UK government debt market appears to be particularly sensitive to such fiscal concerns, making the British Pound comparatively more resilient against sell-offs of the Euro.