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Euro to The Pound Today at 22-Month High, on ‘No Deal’ Risk

Market CommentaryEuro to The Pound Today at 22-Month High, on ‘No Deal’ Risk
Euro to The Pound Today at 22-Month High, on ‘No Deal’ Risk
Euro to The Pound Today.

The euro to pound interbank exchange rate stands at 0.9183 today at the time of writing. This is the euro’s joint highest versus British sterling in 22 months, or since September 5th 2017.

By contrast, back on May 6th this year, the common currency was as weak as 0.8505 versus the pound. So the euro has since strengthened against sterling by over +6.75 cents, or by +7.97%.

This could benefit you, if you’re a Brit selling property abroad in Spain or France, to transfer the funds to the UK, or a Eurozone business owner importing British products for your customers.

This is because, when you exchange currencies, you might now get a higher sterling total in your UK bank account, compared to if you’d transferred money in the preceding 22 months.

As a result, this would make it more profitable for you to transfer the funds of your Spanish or French property sale to the UK, or cut your international payments costs for your Eurozone business.

A first reason why the euro to the pound today has reached this 22-month high is because the financial markets remain concerned about the rising probability that there’ll be a ‘No Deal’ Brexit.

A second factor why the euro has gained in value against British sterling is because it’s forecast that the UK economy slowed over the Spring, ahead of official statistics to be released this Friday 9th August.

Let’s look more closely at these reasons why the euro to pound interbank exchange rate has reached this 22-month high. You might find this helpful, for when you transfer money to the UK this year.

Euro Rates Today Strengthen, as ‘No Deal’ Brexit Increasingly Likely

As I mention, a first reason why the euro to pound interbank exchange rate has reached this 22-month high is because the financial markets think that it’s increasingly likely that the UK will exit the EU without a deal by the extended deadline of October 31st, a so-called ‘No Deal’ Brexit.

It’s feared that this might weigh down the UK’s future economic growth and prosperity.

According to a poll of economists by respected financial news source Bloomberg, there’s now a 30% chance that the UK will exit the EU without an agreement by Halloween. This compares to a 10% probability of a ‘No Deal’ Brexit back in February.

As the odds of a ‘No Deal’ Brexit have risen, the euro has now risen versus the pound for 13 consecutive weeks, an all-time winning streak.

The financial markets think that it’s increasingly likely that there’ll be a ‘No Deal’ Brexit, because new Prime Minister Boris Johnson has made planning for a ‘No Deal’ a priority for his government.

For example, Mr. Johnson has charged his new Chancellor of the Exchequer, Sajid Javid, to find “all necessary funding” to ensure that the UK’s ready to exit without a deal.

In addition, since Mr. Johnson entered Number 10 Downing Street a fortnight ago, he’s refused to meet the EU’s leaders, unless they’ll renegotiate the draft Brexit deal. This includes abandoning the much-discussed Northern Irish backstop, which could keep the UK in the EU’s Customs Union.

However, the EU have so far said that they’ll refuse to re-open the Withdrawal Agreement.

As a result, the UK and the EU are at stalemate, with the clock ticking down to the Halloween deadline. The UK’s default legal position is that we’ll exit the EU on October 31st, with or without a deal.

So unless the new Prime Minister or the EU shift their stance in the slightly-less-than three months to go before the Brexit deadline, there’ll be a ‘No Deal’ Brexit automatically. This has dragged down sterling.

EUR to GBP Rate Might Be Affected, if ‘No Deal’ Brexit Avoided

So the rising probability of a ‘No Deal’ Brexit has strengthened the euro versus the pound. However, it’s worth noting that, according to Bloomberg’s poll of economists, other Brexit outcomes remain possible too.

For example, according to the survey, there’s also a 30% chance that there’ll be a second Brexit extension, plus a 30% chance of a snap general election.

Also, Mr. Johnson has repeatedly said that the odds of a ‘No Deal’ Brexit are “vanishingly small”, reports The Telegraph newspaper. Moreover, a growing number of Conservative MPs are declaring their opposition to a ‘No Deal’ Brexit.

These include senior ex-ministers, such as former Chancellor Philip Hammond, and former Attorney General Dominic Grieve. These MPs could stop Mr. Johnson from achieving a ‘No Deal’.

Moreover, it’s worth noting that the Prime Minister’s majority in the House of Commons currently stands at one MP, including the Conservatives’ alliance with Northern Ireland’s Democratic Unionist Party (DUP).

Given this, Mr. Johnson could find it difficult to pursue his agenda, including Brexit. It will take just one Tory rebel for the government’s bills to be defeated.

As a result, the Prime Minister might be forced to call a snap UK general election, to increase his majority of MPs. Mr. Johnson might do this, to take advantage of his “honeymoon period” with voters, plus his widespread popularity.

If Mr. Johnson calls an election, the EU has said that it will consider further extending the Brexit deadline. This could affect the value of sterling too.

With this in mind, it’s clear that the odds of a ‘No Deal’ Brexit have risen, as Mr. Johnson has taken power. However, Bloomberg’s survey of economists finds that there’s a 70% chance that there won’t by a ‘No Deal’ Brexit by October 31st.

In addition, the government’s own MPs might rebel against Mr. Johnson, to prevent a ‘No Deal’ happening. These possibilities may impact the pound, looking ahead.

Euro to The Pound Today Gains, as UK GDP Forecast to Have Stagnated in Q2

Also, a further explanation why the euro to pound interbank exchange rate has reached this 22-month high is because it’s forecast that the UK economy ground to a halt over the Spring.

To be specific, it’s predicted that UK GDP (Gross Domestic Product) stagnated, or expanded by 0.0%, between April and June. We’ll find out this Friday 9th August, at 09.00 BST, according to FX Street.

If the UK expanded by 0.0% over the Spring, this would mark a clear slowdown from the previous three months’ growth of 0.5%.

This would suggest that the UK economy is decelerating, as the uncertainty around Brexit grows. In turn, this encourages businesses to delay hiring and investment decisions. Already, it looks like the UK factory and construction sectors are contracting.

Furthermore, it’s worth adding that the UK’s seemingly solid 0.5% growth in Q1 2019 was in large part because of stockpiling, as companies bought goods to protect against a ‘No Deal’ Brexit.

So if the UK stagnates in Q2, this might partially be because British businesses bought fewer products, as their warehouses are already full, to prepare for the UK’s original Brexit deadline in March.

The possibility that the UK economy stagnated in Q2 has weakened British sterling, first because weaker economic growth points to fewer investment opportunities in a country.

In turn, this encourages the world’s money managers to take money out of the UK, to place in nations where economic growth is faster, such as the USA. This then weighs down on the value of sterling.

The financial markets’ prediction that UK GDP grew by 0.0% between April and June has also devalued the pound, because this suggests that the UK economy needs greater monetary support.

As a result, this might encourage the Bank of England to cut interest rates below their current 0.75%. This would also make investing in the UK less profitable, this weakening the pound.

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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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