The British pound reached its highest level against the euro in 16 months on Tuesday, as concerns over France's public finances continued to weigh on the single currency. The euro slipped to 84.49 pence per pound, its weakest since June 2025, according to Reuters data, extending a prolonged losing streak for the euro.
Investors have been focusing on France's fiscal outlook, with worries about the country's budget deficit and political uncertainty rippling through eurozone bond markets. That tension has helped cool expectations for further interest rate hikes from the European Central Bank (ECB), as policymakers may be reluctant to tighten financial conditions while fiscal risks loom.
Why the pound is gaining against the euro
The pound's strength against the euro is largely a story of relative interest rates. Markets increasingly expect the Bank of England (BoE) to raise its key interest rate again, with traders pricing in an 81% chance of a hike at the November meeting, based on LSEG data. Higher UK rates make holding pounds more attractive to global investors, because they can earn more interest than they would holding euros.
That "rate gap" has been a key driver of the pound's rise. As the BoE appears more hawkish than the ECB, the pound has found support. Meanwhile, the euro has been dragged down by France's fiscal troubles, which have also pushed up borrowing costs for the French government and raised questions about the stability of the eurozone's second-largest economy.
The tension in eurozone bond markets has been notable. French government bond yields have risen relative to German bunds, a sign that investors are demanding a higher premium to hold French debt. That dynamic has made the euro less attractive, even as the ECB has signaled it may keep rates higher for longer.
The UK's own fiscal test: the October 28 budget
While the pound has been buoyed by rate hike expectations, the UK faces its own fiscal challenge. UK finance minister John Healey is set to deliver his first budget on October 28, and analysts are watching closely for any signs of fiscal tightening or tax increases.
Nomura's Dominic Bunning noted that any tilt toward fiscal tightening or tax rises could weigh on economic growth and eventually dull sterling's momentum. If the budget is seen as too restrictive, it could slow the UK economy and reduce the need for higher interest rates, which would undermine the pound's yield advantage.
The UK's 10-year government bond yield, known as the gilt yield, has already jumped to 5.44%, reflecting both rate hike expectations and concerns about the government's borrowing plans. A higher yield can support the pound, but the reason behind the yield rise matters.
If yields rise because investors expect the BoE to tighten policy to fight inflation, the currency often benefits. But if yields jump because investors demand extra compensation for UK fiscal uncertainty, that tends to be tougher on gilts and on UK-focused, rate-sensitive stocks, and it can cap the pound even if the euro stays weak.
What it means for investors
For everyday investors, the pound's strength against the euro has implications for anyone traveling to Europe or buying European goods. A stronger pound means your money goes further when converting to euros, which could make holidays or imports from the eurozone cheaper.
But the pound's weakness against the US dollar tells a different story. A firmer dollar, supported by higher oil prices, pushed sterling lower versus the greenback. That means US goods and services become more expensive for UK consumers, and any investments denominated in dollars, such as US stocks, will be worth less in pound terms.
The divergence between the pound's performance against the euro and the dollar highlights how currency markets are being driven by different forces. In Europe, fiscal worries are the main driver. In the US, it's the strength of the economy and the Federal Reserve's policy stance.
For investors holding UK assets, the key event to watch is the October 28 budget. If the government signals fiscal discipline, it could support the pound by reassuring markets about the UK's debt trajectory. But if it announces big spending increases without a clear plan to pay for them, gilt yields could rise further, and the pound could come under pressure.
As always, currency moves are just one piece of the puzzle. But for anyone with exposure to international markets, keeping an eye on the pound's direction is important. The coming weeks are likely to bring more volatility, especially with the budget and the BoE meeting on the horizon.
