Daily Market View | Blog By David Stritch, Senior FX Analyst, Caxton
The euro is falling because investors are losing faith in France's ability to bring its public finances under control. On Monday 5 October, EUR/USD dropped to around 1.1118, its weakest level since May 2025. GBP/EUR climbed towards 1.18 as the gap between French and German borrowing costs widened to levels last seen in the 2011 eurozone debt crisis.
Key takeaways
French government bonds sold off sharply, and the euro went down with them. Over the past week, the spread between French 10-year bonds (OATs) and German Bunds widened to around 150 basis points on Friday before settling near 140–145. Put simply, the market now charges Paris about 1.4 to 1.5 percentage points more than Berlin to borrow for ten years. That is the widest gap since the eurozone debt crisis.
The trigger is the 2027 budget. Prime Minister Sébastien Lecornu's government set out its draft last week, ahead of the 6 October deadline to submit the Finance Bill. It plans about €54 billion of savings, including a public-sector pay freeze and limits on pension indexation, with the aim of cutting the deficit to 5% of GDP. Public debt is already around 119% of GDP and is projected to pass 120% next year.
The problem is not the plan on paper. It is whether it can pass. No group holds a working majority in the National Assembly, left-wing parties and unions have called the measures austerity, and strikes have already started. Some analysts expect the arguments between government, Assembly and Senate to run well into the first half of 2027.
When a big economy's bonds sell off because of fiscal worries, money tends to leave its currency as well. France is the eurozone's second-largest economy, so its problems are the euro's problems.
It has been a hard decade for government bonds everywhere. COVID, the energy shock after Russia's invasion of Ukraine, and now the closure of the Strait of Hormuz have damaged public finances from Tokyo to Paris and from Washington to Johannesburg. In that environment, bond markets look for the weakest link, and France has been picked out.
What stands out is that France is singled out less for the size of its deficit than for its parliament's apparent inability to change direction. Commerzbank's Hauke Siemssen has warned that recent bond market moves "increasingly resemble a sovereign debt crisis." There is also a structural point. The European Central Bank's Transmission Protection Instrument, its tool for calming disorderly bond markets, comes with fiscal conditions France may not currently meet. That leaves fewer obvious backstops.
The next stage of the budget debate in the French parliament is the main thing to watch. Behind it sits the presidential election on 18 April 2027, which makes promises of fiscal discipline harder for markets to believe.
Outside France:
If you pay or receive euros, this move affects you directly, though in different ways.
The usual ways to manage this are a forward contract, which fixes an exchange rate today for a payment later, or rate alerts that tell you when a pair reaches a level you have set.
I expect this pressure on the euro to continue until France produces a budget that parliament will actually pass and that markets find believable. A budget plan that cannot get through parliament does not ease the bond market's concerns. Until then, the euro's weakness looks more like a reassessment of the risks than a short-term dip. The euro is oversold in the short term, so sharp bounces are possible, but I would treat them as relief rallies rather than a turn in the trend unless the politics change.
Why is France's deficit a problem for the euro?
France is the eurozone's second-largest economy, so doubts about its finances raise borrowing costs across the bloc and push investors out of euros. The concern is less the deficit itself than whether parliament can agree to reduce it.
What is the OAT–Bund spread?
It is the gap between the yield on French 10-year government bonds and German ones. A wider spread means investors see France as riskier, and at around 140–150 basis points it is at its widest since 2011.
Is the pound strong right now?
Against the euro, yes: GBP/EUR is at multi-month highs. Against the dollar, sterling is broadly flat on the day and down around 1.8% this year.
Will the euro keep falling?
No one can say for certain. Markets will take their lead from the French budget process and, further out, the April 2027 presidential election, so a credible budget agreement could support the euro.
How can a business protect itself from euro volatility?
Common tools are forward contracts, which lock in a rate for a future payment, and rate alerts. Which one suits you depends on your cash flow and how much risk you can take.
If euro volatility affects your margins, your supplier payments or the value of your assets, now is a sensible time to review your currency exposure. Talk to Caxton's FX dealers about whether a forward contract or a rate alert would give your business more certainty over the months ahead.
This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.