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Euro to The Pound Today at 20-Week High, on Hard Brexit Risk

Market CommentaryEuro to The Pound Today at 20-Week High, on Hard Brexit Risk
Euro to The Pound Today at 20-Week High, on Hard Brexit Risk

The euro to pound interbank exchange rate has hit 0.8896 in the past day. This is its highest in 20 weeks, or since January 15th.

By contrast, back on May 6th, the euro was as weak as 0.8505 versus the pound. So it's since risen by over +3.75 cents, or by +4.59%.

To put this into context, at today's interbank exchange rate of 0.8896, €250,000 would be worth £222,400.

By comparison, at the interbank exchange rate on May 6th of 0.8505, €250,000 would have been worth just £212,625.

So since last month, for the same total in euros, that's an increase in the pound amount of +£9,775.

You might find this helpful, if you're a Brit living in Spain, France or Italy, and you're thinking of selling your property abroad to repatriate to the UK.

This could also be useful information, if you're a Eurozone business owner, making international payments to import British goods or services.

This is because, as the exchange rate has risen, you might now get a higher pound total in your UK bank account, compared to if you'd transferred money in the recent past.

If you're selling your Spanish or French holiday home and transferring the funds to the UK, this might lift your pound total. Or for your business, it may cut your import costs.

A first reason why the euro to pound interbank exchange rate has hit this 20-week high is because financial markets are worried about the growing risk of a 'hard' Brexit.

Second, another factor why the EUR has strengthened versus the GBP is because this week the European Central Bank unexpectedly lifted its 2019 economic growth outlook for the Eurozone.

Let's take a closer look at these explanations why the common currency has risen versus the British pound sterling. This might help you to decide when to transfer money to the UK.

Euro to The Pound Today Strengthens, as 'Hard' Brexit Risk Rises

As I mention, a first reason why the EUR to GBP interbank exchange rate has risen is because the financial markets are concerned about the growing risk of a 'hard' Brexit.

A 'hard' Brexit would be when the UK exits the European Union with only minimal economic ties to Europe. This might make it harder to trade with the EU, which would slow the UK's future economic growth.

The financial markets are concerned that the UK might pursue a 'hard' Brexit, because it looks likely that a 'hard' Brexiteer will win the Conservative Party's upcoming contest to replace Theresa May as Prime Minister.

In particular, there's now a 50% chance that ex-Foreign Secretary and 'hard' Brexiteer Boris Johnson will become the next Prime Minister.

Mr. Johnson has pledged to take the UK out of the EU "with or without a deal", by the end of the extended deadline of October 31st, reports PoliticsHome.com.

Mr. Johnson has taken this stance, to win the support of Conservative Party members, who on the whole favour a 'hard Brexit'. This compares to more moderate options that Mr. Johnson might take, such as further extending the Brexit deadline.

However, it's important to note that, just because Boris Johnson looks likely to become the next Prime Minister, it won't be straightforward for him to impose a 'hard' Brexit.

This is because in Parliament a majority of MPs still want the UK to retain closer political or economic ties to the EU, a 'soft' Brexit. So Mr. Johnson could face a vote of 'No Confidence' to stop him.

In addition, were Mr. Johnson to lose a vote of 'No Confidence', he might be compelled to call a general election.

In this case, it's possible that the opposition Labour Party might win the most seats, in which case Jeremy Corbyn would become Prime Minister. Alternatively, the smaller Liberal Democrats and Brexit Parties could win more seats too. So the outlook is up-in-the-air.

The financial markets dislike this uncertainty. This is because they prefer the outlook to be stable, so they can estimate what return they'll get on their investments in British assets.

With this in mind, the pound has weakened, given the rising probability that Boris Johnson could become Prime Minister, and the possibility that Parliament might call a vote of 'No Confidence' in him.

EUR to GBP Climbs, as ECB Upgrades Eurozone 2019 Growth Outlook

Also, another partial explanation why the EUR GBP exchange rate has reached this 20-week high is because, yesterday, the European Central Bank (ECB) was unexpectedly upbeat about the Eurozone's economic outlook.

In particular, the ECB refrained from mentioning the possibility of cutting interest rates further. The ECB also lifted its 2019 economic growth forecast for the Eurozone.

The Eurozone's central bank met in Frankfurt yesterday, on Thursday 6th May. As widely forecast by economists and the financial markets, the ECB held interest rates at 0.0%, their all-time low.

The ECB has held interest rates low, since the global financial crisis a decade ago. This is to make taking out loans in the Eurozone cheaper, to encourage faster economic growth.

Surprisingly however, the ECB was optimistic about the Eurozone's economic growth outlook for this year. To be specific, the central bank upgraded its GDP (Gross Domestic Product) projections for 2019 by +0.1%, to 1.2%.

In addition, the ECB refrained from mentioning the possibility that it might cut interest rates below 0.0%, to further support growth.

The ECB upgraded its GDP expansion outlook yesterday, even though the Eurozone faces multiple risks to its economic growth outlook. In particular, the USA has repeatedly threatened to place tariffs on EU vehicle exports to America.

Vehicle manufacturing is one of the Eurozone's biggest industries, especially in Germany. So the USA's threats would weigh on the Eurozone's future growth.

In addition, the Eurozone's economic growth outlook could also be weighed down by Brexit. After all, the UK is Europe's second largest economy, and the sixth largest economy in the world. So the UK has serious economic weight.

If there's a 'hard' Brexit, trade between the UK and the rest of Europe might slow, which would weigh on the UK's trade partners on the continent.

However, in spite of these threats, the ECB was optimistic on Thursday. Following the central bank's decision, the financial markets reduced the odds that the ECB will cut interest rates this year to just 35%, from 47% previously.

In turn, higher interest rates make investing in Eurozone assets more attractive for global money managers. So the ECB's positivity has helped lift the euro exchange rates.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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