Euro hits 16-month low vs pound on French bond fears

France's borrowing costs stayed near 24-year highs on Wednesday, Oct. 7. Concern over the country's public finances ahead of the 2027 presidential election kept pressure on the euro, which fell to a 16-month low against sterling. France's 10-year yield briefly went above 5% last week, its highest in 24 years. Its premium over German debt has widened to levels last seen in the euro zone debt crisis of 2010-2012.reuters+1

Bloomberg reported that the gap between French and German 10-year yields reached 154 basis points on Oct. 2, on course for the widest since 2011. MUFG analysts said the spread had almost doubled from its level at the end of July, and that the 10-year yield rose by about 100 basis points before peaking at 4.99%.mufgresearch+1

"No room for mistakes"

Angel Ubide, head of economic research for fixed income and macro at Citadel, told Reuters that France no longer has any room for mistakes in getting its fiscal house in order. He said market pressure should help focus minds in Paris on cutting spending before the election. In his view, France does not pose a systemic risk to Europe yet. "If we are discussing a systemic problem with France, we are discussing a systemic problem for Europe," Ubide said. "I would hope and expect that we don't get to the point of having that discussion."reuters

Banque de France Governor Emmanuel Moulin said on Wednesday that "the conditions are not met today for intervention by the ECB." He added that France's fiscal problems can be addressed by approving a budget and committing to bring the deficit below 5% of GDP. Lawmakers are scheduled to hold the first vote on the budget's revenue section on Oct. 20.mufgresearch

Euro slides

Reuters reported that the euro fell to its lowest level against the pound since June 2025, its ninth straight losing session. Against the dollar, the euro dropped about 0.6% to near 1.12. The turmoil in euro zone bonds has also reduced expectations of further rate hikes by the European Central Bank. Traders, meanwhile, see an 81% chance that the Bank of England will raise rates in November, according to LSEG data.globalbankingandfinance

Bank of America strategists estimate that each additional 10-basis-point widening in the French-German spread is associated with a 0.4% fall in EUR/USD. Last week, the gap between Italian and German yields reached almost 130 basis points as investors moved into German Bunds.reuters

MUFG cut its EUR/USD forecast to 1.12 for the end of the year. The bank warned that non-residents hold 57.5% of French government debt, and that this share could make the selloff worse because foreign investors can pull money out quickly. Bloomberg reported that Sumitomo Mitsui Asset Management's global fixed income team had sold its entire position in French government bonds.mufgresearch

MUFG's base case is that Marine Le Pen's National Rally, the frontrunner in the election, ultimately lets the budget pass. "Nobody wants a Liz Truss moment," the bank's analysts wrote.mufgresearch