Traders Lean Into Euro Rebound Versus Pound After Rare Slide

What happened to the pair

The euro's late September to late October drawdown versus the pound ranked among the 1 percent largest 25-day declines of the past five years. The number of down days in that stretch ran close to a record, and October marked the cross's weakest month since July 2022. From late-September highs, the rate is down about 3 percent, while currently sitting around 0.8365 - roughly 0.6 percent above its recent trough.

Why traders are repositioning

Two drivers pushed the euro lower. French budget worries weighed on European assets, while sterling found support from steady UK growth, signs of a stabilizing jobs market, and lower political risk. After a move that sharp, some investors are bracing for a technical bounce. That shows up in options, where euro-sterling risk reversals have reached their most euro-positive read since early October.

What market participants say and what it means for your portfolio

"The pessimism priced into the euro on France risk is excessive," said Van Luu of Russell Investments, who leads currency and fixed income solutions strategy. He added that sterling already reflects the UK's resilience, while the euro has drifted away from levels implied by interest rate differentials versus the pound. On France, Luu said the fiscal backdrop is still challenging, but the firm's base case is that a budget passes, and that the European Central Bank can deploy measures to prevent a deeper bout of market turmoil.

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On a short-term tactical trade, Russell Investments has gone long euro-sterling and anticipates a rise of roughly 3 to 4 percent over the coming three to six months. The firm prefers expressing a euro rebound against the pound rather than the dollar because this cross tends to be affected less by geopolitical shocks. The bottom line: if that thesis plays out, positions linked to the euro-sterling cross could have room to recover.

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