Euro hits fresh two-month lows against British Pound after hot Eurozone inflation data

The Euro (EUR) reverses previous daily gains against the British Pound (GBP) on Friday, diving to fresh two-and-a-half-month lows just above 0.8500, and is set to show a more than 1% weekly decline. A toxic mix of surging Eurozone inflation, high Oil prices and escalating borrowing costs in France is keeping investors away from the Euro, which shows the weakest weekly performance among the G8 majors.

Data released by Eurostat earlier on Friday revealed that the Eurozone’s preliminary Harmonised Index of Consumer Prices (HICP) accelerated in September to three-year highs, boosted by the higher costs of energy stemming from the Middle East war.

The Headline HICP rose to a 3.8% year-on-year (Y-o-Y) rate, from 3.2% in August, beating expectations of a 3.6% growth. The core HICP, which strips off the influence of food and energy costs, has shown a more moderate increase, to 2.5% from 2.4% in August, in line with the market’s expectations.

French debt in the spotlight 

Beyond that, concerns about France’s soaring borrowing costs remain front and centre, as the gap between the German and the French government bond yields surged beyond 140 basis points on Friday, the highest differential since 2012, in the aftermath of the Eurozone's credit crisis.

The French government presented the 2027 budget bill on Thursday, which includes measures to reduce the fiscal deficit, but there are few hopes that it will pass a divided parliament as the opposition parties take positions to replace President Macron after next year’s elections

Crude Oil prices are trading lower on Friday amid reports that supplies from Gulf countries neared pre-war levels in September. This, however, is providing little support to the Euro, as Brent Oil prices remain close to the key $100 level, more than 30% above early July lows, at levels that pose significant pressure on the region's economic growth.

In the UK, in the absence of key macroeconomic releases, the Pound keeps drawing some support from hawkish comments by Bank of England (BoE) officials earlier in the week. Strategists at Rabobank, however, caution that “more than 100 bps of policy tightening is priced in on a 12-month view,” which, in their view, leaves limited scope for further GBP upside from the rates channel, and “it is more likely that GBP could soften as rate hike risks are reined in.”