Inflation across the eurozone jumped this week. Today, the figure for the whole eurozone came in at 3.8%, above expectations of 3.6% and up from 3.2% in August. Yet the euro barely reacted.
Normally, rising inflation helps a currency, because it makes higher interest rates more likely. It has played out differently this time as GBP/EUR has reached its strongest level in around two months, and EUR/USD has fallen through the bottom of a range that had held since May 2025.
The main reason is France. Its borrowing costs are rising fast, and that leaves the European Central Bank in a difficult position: it cannot respond strongly to inflation without making France's debt problem worse.
Against the pound, the first half of October looks like a period where the euro carries more of the risk, before the focus shifts to the UK Budget on 28th October. Against the US Dollar, the euro faces pressure from both France and a strong Dollar.
Eurozone inflation jumped this week
Every major eurozone economy reported inflation above expectations for September, and every one rose sharply from August.
The figure for the eurozone as a whole, published on Friday, came in at 3.8%, above expectations of 3.6% and up from 3.2% in August. Prices rose 0.6% in September alone.
The more important detail is core inflation, which strips out energy and food prices. It came in at 2.5%, exactly as expected. That tells us the jump is mainly about energy costs from the Middle East conflict, rather than prices rising right across the economy. Because the ECB pays most attention to core inflation, Friday's figures add little extra pressure for aggressive rate rises, and the euro barely moved on the news. GBP/EUR held at around 1.174, close to its highest level since July.
The pressure further up the chain is even stronger. The prices factories charge rose almost 11% over the year, up from under 8%. That is higher energy costs from the conflict in the Middle East feeding through, and it usually reaches shop prices within a few months.
Rising prices, weak growth: the stagflation problem
If inflation were rising because the eurozone economy was booming, it would be good news for the euro. Higher interest rates would follow, and investors would buy euros to earn the better return.
That is not what is happening. At the same time as prices are rising, the eurozone economy is weak. German shoppers cut their spending in August, unemployment is rising, and business confidence is fragile.
Rising prices alongside a stalling economy is known as stagflation. It is one of the hardest problems for a central bank, because the usual cure for inflation, raising interest rates, slows the economy further.
ECB President Christine Lagarde has said she sees inflation risks to the upside and growth risks to the downside, and that the bank will stay on a "middle path" with a "measured response". In plain terms, the ECB knows inflation is rising, but it is choosing to move carefully rather than aggressively. Markets therefore do not expect big rate rises, which is why hot inflation figures are not giving the euro much of a lift.
It's all about France's borrowing costs
The single most useful thing to watch for the euro right now is the gap between what France and Germany pay to borrow.
Germany is seen as the safest borrower in Europe. So the extra return investors demand to lend to France instead is a simple, real-time measure of how worried they are about France. That gap has more than doubled since February and is now around 1.4 percentage points, its widest since the eurozone debt crisis of 2012. French borrowing costs are rising while German borrowing costs are falling, as investors move money from France to Germany.
France is borrowing heavily, with debt of around 119% of the size of its economy and a deficit of more than 5%. The government's draft 2027 budget includes a €54 billion savings plan, but it has to get through a parliament with no majority, and many investors do not think it goes far enough to fix the underlying problem. The debate begins on 13th October, and a presidential election follows in April 2027.
This is what ties everything together:
- Higher inflation means the ECB should raise rates.
- Higher rates make France's debt even more expensive to pay, which widens the gap further.
- So the ECB is boxed in. It cannot respond strongly to inflation without putting more strain on the eurozone's weakest large economy.
That is why inflation that would normally support the euro is weighing on it instead. Markets are watching France's borrowing costs more closely than the inflation numbers themselves.
If France's budget is received well and the gap narrows, the euro would lose one of its main weaknesses. If the debate goes badly, or the government looks at risk of falling, the gap could widen further and the euro could come under more pressure.
Is this 2012 again?
The last time a gap in borrowing costs drove the euro this hard was the eurozone debt crisis of 2011 and 2012. Then, it was Italy, Spain and Greece paying far more than Germany to borrow, and markets feared the euro itself could break apart.
The effect on the pound was dramatic. GBP/EUR rose from around 1.10 in mid-2011 to almost 1.29 in July 2012. The turning point came on 26th July 2012, when ECB President Mario Draghi promised to do "whatever it takes" to protect the euro. Once markets believed the ECB would stand behind weaker countries' debt, the pressure eased and the euro recovered. Within a year, GBP/EUR was back towards 1.15.
What is similar now. The euro's weakness is again being driven by a large member's borrowing costs, this time France rather than Italy and Spain. It is again tied to divided politics that make spending cuts difficult. And the euro is weakening broadly, against the US Dollar as well as the pound.
What is different.
- The scale. At the worst point of the crisis, Italy and Spain were paying around 5 to 6 percentage points more than Germany to borrow, and France's own gap peaked at around 2.25 percentage points in November 2011. France today is at around 1.4. That is serious, and the widest since 2012, but still well short of crisis levels, and there is no talk of the euro breaking up.
- The ECB already has a safety net. In 2012, Draghi's promise did not come until the crisis was well advanced. Today, the ECB has a tool designed for exactly this situation, and markets know it is there. That limits how far the pressure is likely to run.
- The UK is not a safe haven this time. In 2012, money flowed into the UK as a safe place to invest. Today, UK borrowing costs are at multi-decade highs and the Budget is a risk of its own. The pound is benefiting from the euro's problems, not from being seen as safe.
- Inflation is the opposite. In 2012, inflation was low and the ECB was free to cut rates and support the system. Today, inflation is rising, which is exactly what makes the ECB's job harder.
In short, the same forces are at work, but in a milder form. A move on the scale of 2012 looks unlikely, but it is a reminder of how far the euro can fall when markets lose confidence in one of its members.
The ECB's safety net, and how it differs from QE
The tool the ECB has today is called the Transmission Protection Instrument, or TPI. It was created in 2022 and lets the ECB buy the government bonds of one specific country if that country's borrowing costs rise in a way the ECB sees as disorderly or not justified by its economy.
That sounds a lot like quantitative easing (QE), and in one sense it is: in both cases, the central bank creates money to buy government bonds. The difference is the purpose.
- QE adds money to the whole system. The ECB buys bonds across all eurozone countries to push borrowing costs down everywhere and support the economy. It is a way of loosening policy.
- The TPI is meant to redirect support rather than add to it. The ECB has said it can use it without changing its overall policy, for example by buying French bonds while reducing its holdings elsewhere. The aim is to stop one country's borrowing costs breaking away from the rest.
A simple way to think about it: QE turns the tap up for everyone, while the TPI points the hose at one fire.
There are two catches. First, the TPI has never been used, so nobody knows exactly how the ECB would act in practice. Second, there are conditions. A country generally needs to be following EU budget rules to qualify, and France is already under EU procedures because its deficit is too large. Whether and how quickly the ECB would step in for France is therefore a genuine grey area, and that uncertainty is itself part of why the euro is under pressure.
Many investors also argue that if the ECB ended up buying large amounts of one country's debt, the line between the TPI and QE would blur. That prospect alone can weigh on the euro.
The global bond sell-off: why it hasn't hurt the pound
On 1st October, government borrowing costs in the US, UK, France and Japan hit their highest levels in decades. UK 30-year borrowing costs rose above 6% for the first time since 1998.
The main driver is the conflict in the Middle East. It has pushed up energy prices, energy is pushing up inflation everywhere, and investors expect interest rates to stay higher for longer. Because this is happening across the world, no single country is being singled out.
That matters, because whether higher borrowing costs help or hurt a currency depends on why they are rising:
- When they rise because an economy is strong and interest rates are expected to go up, they attract foreign investors looking for a better return. Those investors need to buy the currency to invest, which supports it. This is largely what has been happening with the pound.
- When they rise because investors are worried about a government's finances, investors are selling, not buying. Borrowing costs go up and the currency goes down at the same time. That is what happened in the UK's 2022 mini-Budget crisis.
The current sell-off is a global one, so the pound has held up well. The risk to watch is a sell-off driven by UK-specific worries, for example a Budget on 28th October that the market does not trust. That would be a different situation, and the pound would likely fall alongside UK government bonds.
Traders are betting against the pound, and why that can push it higher
Many professional investors are positioned for the pound to fall. In the options market, around three-quarters of the trades on the pound against the euro this month are bets or insurance on the pound weakening in the week after the Budget. Weekly figures from the US futures market also show speculators holding large bets against the pound.
That might sound like bad news, but it can work the other way. When the pound rises instead of falling, those traders have to buy pounds to close their bets, which pushes it higher still. That is likely part of why the pound has kept climbing this week.
It also explains why a calm, uneventful Budget could give the pound a lift. With so many braced for trouble, a Budget that turns out to be sensible would force many of those positions to unwind. The flip side is that a disappointing Budget would be exactly what those traders are positioned for.
The euro against the pound: October in two halves
Against the pound, the risk this month falls on different sides at different times.
Now to mid-October: the euro carries more of the risk. Weak German factory figures are due on 6th and 7th October, eurozone finance ministers meet on 8th and 9th, and France's budget debate begins on 13th October. Investors often get more nervous as a big political event approaches, so France's borrowing costs could stay high or rise further into the debate. Meanwhile, the UK economy has been beating expectations, with growth revised up this week.
This is not a one-way street. A firm message on interest rates from the ECB could support the euro, and because many investors are already betting against the euro, any good news from France could cause a sharp bounce. France's budget debate also runs for weeks, so the euro's problem does not end on 13th October.
From around 20th October: the pound carries more of the risk. UK jobs figures on 20th October and inflation on 21st October will decide whether the Bank of England raises rates in November. Then comes the Budget on 28th October, the biggest single risk for the pound this autumn, followed by the ECB's rate decision the next day.
The euro against the US Dollar
EUR/USD has fallen to a 17-month low at around 1.125, after briefly dipping close to 1.12, breaking below the bottom of a range, around 1.131, that had held since May 2025. When a floor that has held for that long gives way, traders often take it as a sign the move has further to run. ING has warned that if France's borrowing gap keeps widening and US data stays strong, the euro could fall into the 1.11 to 1.12 area. The 100-day average, a line traders use to judge the general direction, is well above the current rate at around 1.152 and turning lower, a sign that momentum is with the Dollar.
What has been pushing the euro down. Most of the euro's recent fall against the Dollar has been about Dollar strength rather than euro weakness. The US Federal Reserve is raising interest rates, the US economy is growing strongly (2.2% a year in the second quarter, against 1.5% expected), and the conflict in the Middle East has pushed investors towards the Dollar, which tends to be seen as a safe place in uncertain times.
What could hold it up. Some analysts think the Dollar's rally has gone too far, too fast, and is due a pause. Signs of a cooling US jobs market could help: Friday's US jobs report is expected to show 90,000 jobs added in September, down from 162,000.
Where France fits in. France adds a euro-specific risk on top. If its budget debate goes badly, investors would sell the euro against all currencies, adding to the pressure now that the range has broken. A well-received budget would remove one of the euro's main weaknesses and could help it recover some ground.
Key dates for EUR/USD:
- Friday 2nd October: eurozone inflation in the morning, US jobs report in the afternoon.
- Tuesday 13th October: French budget debate begins.
- Wednesday 14th October: US inflation.
- Wednesday 28th October: US Federal Reserve interest rate decision, in the evening.
- Thursday 29th October: European Central Bank interest rate decision.
How the two fit together. If France's problems deepen, the euro would likely fall against both the pound and the Dollar. But in a broad global sell-off, investors tend to buy the Dollar over the pound too. So it is possible for the pound to rise against the euro while falling against the Dollar at the same time.
What this means for your business
For businesses buying euros with pounds, the pound is currently in a stronger position than it has been for some time, while much of the near-term risk sits with the euro. That picture could change quickly from around 20th October, when UK inflation figures and the Budget take over.
For businesses with costs or income in both euros and US Dollars, the euro has just fallen through an important level against the Dollar, and events in France and the US could keep it moving sharply in either direction.
Some businesses may wish to use the coming weeks to protect part of their upcoming currency costs, rather than heading into the busiest part of the month fully exposed. There are practical ways to do this: fixing the rate on part of your upcoming payments, setting up orders that act automatically if the market reaches a level you are comfortable with, or protecting yourself against a fall while keeping the chance to benefit if the rate improves.
For more detail, see our earlier pieces: GBP/EUR Ahead of the Autumn Budget and the October 2026 Economic Calendar.
If you would like to talk through how these events 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.