Insights 
VT 
The EUR/GBP pair increased for the second day, boosted by the European Central Bank’s stable monetary policy. The exchange rate was trading around 0.8710, marking a 0.20% rise. The ECB’s September Monetary Policy Meeting Accounts indicated broad agreement that the current policy aligns with the 2% inflation target.
Political Challenges in France
However, the Euro faces potential challenges from the political situation in France. The resignation of Prime Minister Sébastien Lecornu due to budget negotiation failures has added uncertainty. President Emmanuel Macron must appoint a new Prime Minister soon to prevent a parliamentary dissolution.
In the UK, the British Pound is supported by comments from the Bank of England’s Catherine Mann. She stated that restrictive monetary policy remains necessary to tackle inflation and support growth. Chief Secretary to the Treasury, James Murray, emphasised a cautious approach to spending, avoiding emergency fund use for pay increases.
The Euro demonstrated strength against major currencies, including the British Pound. Meanwhile, the US Dollar maintained its position ahead of key data releases. Overall, cautious financial management and policy decisions are influencing currency stability in Europe and the UK.
The main takeaway for us is the risk brewing in France, which could easily overpower the European Central Bank’s steady hand. The country’s budget deficit, which we saw trending above 5% of GDP through 2024, is now at the heart of this political crisis. This makes buying put options on EUR/GBP an attractive hedge against a sudden drop in the coming weeks.
Bank of England’s Role
On the other side of the pair, the Pound is backed by a Bank of England that seems determined to keep policy tight. With the latest September data showing UK core inflation stubbornly high at 3.5%, a figure well above target, we don’t expect any rate cuts soon. This creates a clear policy divergence with the ECB, which appears more content with its current rate of 4.25%.
The uncertainty around the new French Prime Minister appointment means we should prepare for higher volatility in EUR/GBP. The spread between French and German 10-year government bonds has already widened by 15 basis points this week, showing that bond traders are getting nervous. We could consider options strategies like a long straddle to profit from a large price swing, regardless of the direction.
We’ve seen how fiscal concerns can hit a currency hard, just by looking back at the UK’s “mini-budget” crisis in 2022. That event sent the Pound tumbling and serves as a powerful reminder of how quickly markets can punish perceived fiscal irresponsibility. The situation unfolding in France has echoes of this, suggesting downside risk for the Euro is significant.
