Euro Under Pressure as French Budget Hits Its First Hurdle

The euro has had another difficult week, although it steadied moving into today.

Two things were behind the weakening euro. France’s budget ran into trouble on its first day in parliament, and the European Central Bank gave no sign it is ready to help. 

France’s budget hits its first hurdle 

The French government wants to cut its deficit from 5.4% of the economy this year to 5% next year. 

Its plan contains €43bn of new savings, taking the total effort to €54bn. That includes freezing public sector pay and most pensions. 

On Wednesday, in one of their first votes on the budget, French lawmakers scrapped a planned cut to a tax break for pensioners. 

That matters. Pensions are France’s biggest public expense at €436bn next year, around 14% of the economy, and older voters turn out in the greatest numbers. With a presidential election in April, few parties want to be seen cutting them. 

The government also hopes to save €4.1bn by raising most pensions by less than inflation, which faces the same resistance. 

The politics are difficult. The last two prime ministers lost their jobs over spending cuts, and public sector workers have already gone on strike over the pay freeze. 

Investors noticed
French ten-year borrowing costs touched almost 5% on Thursday, close to their highest since 2008. 

France now pays about 1.4 percentage points more than Germany to borrow, having touched 1.5 last week, the widest gap since the Eurozone debt crisis. 

France’s own budget watchdog has called the 5% target a minimum and the government’s growth forecast optimistic. 

The country also needs to borrow a record €340bn next year, and its debt now stands at 119% of the size of its economy, the highest since the Second World War. 

There was some relief earlier in the week. Marine Le Pen, who leads the polls for the presidency, pledged a binding rule to cut the deficit every year. French debt steadied for a day, then fell again once the budget votes began. 

The government may yet push the budget through without a vote, as it did in January. That would get a budget passed, though at a political cost. The debate reaches the full chamber on 13th October. 

The government also faces a no-confidence vote over the budget, which it is expected to survive if either the Socialists or the National Rally abstain. 

The worry isn’t confined to France. Spain’s Prime Minister has called a snap election for 29th November after his housing reforms were rejected in parliament, and Italy’s borrowing costs have also risen relative to Germany’s. 

What the ECB’s meeting record tells us 

The ECB on Thursday published the record of its September meeting. These records are the best guide to what a central bank is likely to do next, because they show what was debated as well as what was decided. 

The decision was unanimous. Every member backed raising the interest rate to 2.5%, a level the ECB still regards as neutral, meaning one that neither speeds the economy up nor slows it down. 

The reason was energy. Oil was trading at $97 a barrel at the time of the meeting and is above $100 now, and European gas prices are at their highest since early 2023 with storage levels low heading into winter. 

Inflation has since reached 3.8%. The ECB expects it to average 3.6% in the final three months of this year, and to return to its 2% target towards the end of 2027. 

What the ECB has not yet seen is higher energy costs spreading into wages and other prices. Wage growth is slowing, and inflation in services fell in August. 

That’s the thing to watch. If energy costs start feeding into wages and prices more widely, further rate rises become likely. If they don’t, the ECB can afford to wait. 

On growth, the ECB called the economy resilient and raised its forecasts to 0.9% for this year and 1.4% for next. Thursday’s figures were less encouraging, with German exports unexpectedly falling in August. 

On what comes next, the ECB was deliberately neutral. It said September’s rise was neither one step in a planned series nor the last one. Markets currently expect around three more rises over the next year. 

Two points matter for the euro in particular. 

The first is that the ECB noted higher long-term borrowing costs do some of its work for it by slowing the economy. The more they rise, the less it needs to raise rates itself, which removes some of the support for the euro. 

The second is government debt. The ECB expects the combined deficit of Eurozone governments to rise from 3% of the economy last year to 3.6% this year. 

The record described bond markets as orderly and said governments need to keep their finances sound. The meeting took place before the worst of the French sell-off, so it’s a little dated. Even so, nothing in it, or in speeches from ECB officials this week, suggests the bank is preparing to step in. 

The pound 

The pound has held on to most of its gains against the euro. 

The UK has support of its own. Growth for the second quarter was revised up to 0.5%, and the Bank of England looks increasingly likely to raise interest rates. 

Bank of England Governor Andrew Bailey said on Thursday that the Bank can only tolerate energy-driven inflation while people expect it to be temporary, and that the longer energy prices stay high, the harder that becomes. 

The Bank held its rate at 3.75% in September on a 6-3 vote, and markets now see around a 90% chance of a rise to 4% on 5th November. 

He also had a message for the Budget, saying the government’s plans must be credible and be seen as credible by markets. 

Investors continue to view the UK’s finances more favourably than France’s. The extra interest the UK pays compared with France has shrunk from almost 1.4 percentage points in May to under 0.6. 

The risk runs the other way as well. The UK imports its energy too, and a survey on Thursday showed more pressure on house prices than expected. 

UK ten-year borrowing costs hit a 19-year high on Wednesday, and the Budget on 28th October is still the biggest single test for the pound this autumn. 

Analysis from EY suggests the Chancellor needs to raise at least £12bn, after the room for manoeuvre in the public finances roughly halved since March. A limited Budget of that size is less likely to unsettle markets than a large one. 

How high has the pound been before, and what did it take? 

With the pound at its strongest against the euro in more than a year, a useful way to judge how much further it could go is to look at when it was last higher, and what was driving it then. 

There are three stages worth knowing. 

The first is where we are now. The pound reached this level in July and again this week. 

The second is where it traded in spring 2025. To return there, French borrowing costs would probably need to stay high or rise further, with no sign of support from the ECB. 

The third is its recent peak, between December 2024 and early March 2025. Back then the UK had a larger interest rate advantage, the euro was under pressure from US tariff threats, and there was no UK Budget on the horizon. 

Each step needs more to go right than the last. 

It’s also worth remembering how that period ended. In early March 2025 Germany announced a large spending plan, the euro jumped, and the pound fell by around 2.5% in just over a week. Within six weeks it was more than 5% lower. 

This time the equivalent would be the ECB stepping in to support French debt, or a budget deal in Paris. 

What could turn it around 

The euro’s fall has been fast, and fast moves often pause or partly reverse. 

There are early signs of that. The gap between French and German borrowing costs stopped widening towards the end of the week, and the euro has edged off its lows. 

This week’s reaction to Marine Le Pen’s pledge showed how quickly sentiment can shift on a single political statement. 

The ECB’s own record noted the possibility of a settlement in the Middle East this autumn. That would lower oil and gas prices, which would ease the pressure on the euro. 

Key dates 

Planning ahead
Nobody can say whether the euro has further to fall. It might.
The more useful question is what a move back would cost. Some businesses with euro payments due in the coming months may wish to consider whether current levels meet their budget, and whether fixing a rate for part of that requirement would give them useful certainty.
For businesses receiving euros, the move has gone the other way, and it may be worth reviewing exposure ahead of the Budget and the central bank decisions.
If you would like to talk through how these moves could affect your business, please speak to the Lamera dealing team.

This article provides general market information and is not a recommendation based on your individual circumstances. Please speak to us before making any decisions.

Frequently asked questions
Why is the pound rising against the euro?
The main reason is a weaker euro. Investors are worried about French government debt, and France’s budget ran into opposition on its first day in parliament. The UK also has higher interest rates than the Eurozone, which makes the pound more attractive to hold.

Will the Bank of England raise interest rates in November?
Markets see around a 90% chance. The Bank held its rate at 3.75% in September on a 6-3 vote, and Governor Andrew Bailey has since said its patience with energy-driven inflation is running out. The decision is on 5th November, a week after the Budget.

Will the ECB raise interest rates again?
The ECB has not committed either way. It raised its rate to 2.5% in September and says it will decide meeting by meeting. Markets expect around three more rises over the next year, depending largely on whether high energy prices feed into wages and other prices. Its next decision is on 29th October.

When was the pound last this strong against the euro?
On Wednesday the pound reached its highest against the euro since June 2025. Its recent peak came between December 2024 and early March 2025.

What happened the last time the pound peaked against the euro?
It fell back quickly. In early March 2025 Germany announced a large spending plan, the euro jumped, and the pound fell by around 2.5% in just over a week. Within six weeks it was more than 5% lower.

Could the pound go higher against the euro?
It could, but each step higher needs more to go right. A return to the levels of spring 2025 would probably need French borrowing costs to stay high with no support from the ECB. A return to the early 2025 peak would also need the UK Budget to pass without unsettling markets.

What could make the pound fall against the euro?
Two things stand out. The first is the ECB stepping in to support French debt, or a budget deal in Paris. The second is a UK Budget that relies on more borrowing than markets expect.