Euro Slides Toward Multi-Year Low Against Sterling As Options Traders Turn Most Bearish Since 2024

The euro has now fallen against the British pound for four straight weeks, with options markets showing traders at their most bearish on the single currency against sterling since mid-2024, as France’s deepening fiscal crisis drags on euro zone sentiment.

Executive Summary:

• The euro has declined against sterling for four consecutive weeks, down 1.8% for the year and on pace for its largest monthly drop against the pound since May 2023.
• Money markets expect at least three quarter-point Bank of England rate hikes by April, versus roughly two from the European Central Bank over the same period, widening the rate gap in sterling’s favor.
• Options markets show traders at their most bearish on the euro against the pound since mid-2024, according to LSEG data, as investors pull money from euro zone assets.

Macro Breakdown: ING strategist Chris Turner framed the move precisely: “It looks like there is both independent sterling strength and independent euro weakness at play in euro/sterling.” On the sterling side, hotter-than-expected UK inflation data has reinforced Bank of England tightening bets. On the euro side, France’s fiscal crisis, with 10-year OAT yields pushing to 24-year highs, is doing real damage to sentiment across the currency bloc, even though the move has been largely contained to French assets rather than spreading evenly across the eurozone. Turner expects Bank of England hikes in both November and February, a combination that makes sterling an unusually high-carry currency within Europe right now, where investors can borrow the lower-yielding euro to fund higher-yielding sterling positions.

Currency Pair & Market Impact: Euro zone equities have felt the same pressure as the currency: the STOXX 600 dropped roughly 1% against a comparatively milder 0.6% decline for the FTSE 100, while UK gilt yields stayed flat even as French, Italian, and Belgian yields rose steeply. That divergence, UK assets outperforming euro zone assets across stocks, bonds, and currency at once, is consistent with capital actively rotating out of the eurozone and into UK assets rather than a broad risk-off move hitting both regions equally.

Forward-Looking Outlook: UK Finance Minister John Healey delivers his first budget on October 28, an event major investors currently expect to pass without unduly rattling markets, which would leave the rate-differential and France-related drivers as the dominant forces behind euro/sterling in the near term. A further deterioration in France’s fiscal position, particularly if Moody’s moves on the country’s credit rating, would likely extend the euro’s slide rather than reverse it, while any unexpected shock from Healey’s budget is the clearest near-term risk to sterling’s side of the trade.

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