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Euro to The Pound Today Near 23-Month High, on ‘No Deal’ Risk

Market CommentaryEuro to The Pound Today Near 23-Month High, on ‘No Deal’ Risk
Euro to The Pound Today Near 23-Month High, on ‘No Deal’ Risk
Euro to The Pound Today.

The euro to pound interbank exchange rate stands at 0.9243 today at the time of writing. This is just -0.05% below the euro’s 23-month high versus sterling, its strongest since August 29th 2017, reached earlier this week, of 0.9248.

By comparison, back on May 6th, the common currency was as low as 0.8505 versus the pound. So the euro has since risen by over +7.25 cents, or by +8.67%.

The euro to pound interbank exchange rate has now risen for 13 consecutive weeks. This is the euro’s longest winning streak versus sterling since the euro was set up, in 1999.

The euro’s all-time high versus sterling is 0.9714, reached in December 2008, during the global financial crisis a decade ago. So at present, the euro is only -4.84% below this level.

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

This is because, when you transfer money to your UK bank account, you might now get a higher pound sterling total, compared to if you’d exchanged currencies in the last 23 months.

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

To stay updated with the euro to pound interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘EUR’ to ‘GBP’ to see the interbank exchange for the last seven days.

Also, to check what’s influencing the value of the common currency versus sterling, visit our EUR to GBP Exchange Rates Updates page. Here, simply click on the latest article.

A first reason why the euro to the pound today has neared this 23-month high is because the financial markets are increasingly concerned that there’ll be a ‘No Deal’ Brexit by October 31st.

However, looking forward, the value of the euro against the pound might be affected, because the USA’s and China’s trade dispute is increasingly weighing on the Eurozone’s economy.

Let’s take a closer look at these factors why the euro to pound interbank exchange rate stands near a 23-month high today, and what might affect the value of the EUR to GBP, looking ahead.

Euro to The Pound Today Nears 23-Month High, as ‘No Deal’ Brexit Risk Grows

As I mention, a first reason why the euro to pound interbank exchange rate has neared this 23-month high today is because it looks increasingly likely that there’ll be a ‘No Deal’ Brexit by the extended deadline of October 31st.

According to the financial markets, there’s now a 38% chance that the UK will exit the EU without a deal, compared to just 10% back in February.

A ‘No Deal’ Brexit is when the UK exits the EU, by breaking our existing political and economic ties, with no future arrangements in place.

The plus side of a ‘No Deal’ is that we’d immediately become a sovereign nation again. We could pass laws without Brussels’ interference, set our own trade tariffs, and reach trade agreements with other countries like the USA or Australia.

However, the downside of a ‘No Deal’ Brexit is that we’d be cutting ties with the EU after more than forty years of close integration.

At present, the UK works with the EU in lots of ways, including joint-research at our universities, tariffs and bureaucracy-free imports and exports, plus we benefit from European talent at our companies. With a ‘No Deal’ Brexit, we’d risk losing these ties.

The pound has weakened as the probability of a ‘No Deal’ Brexit has risen, because the financial markets and many British businesses are concerned that it would slow the UK’s economic growth.

In particular, after leaving the EU, we’d immediately revert to trading with Europe on worse World Trade Organisation terms, when we currently do roughly half our trade with the continent.

This week, it’s thought that the risk of a ‘No Deal’ Brexit has risen, because Prime Minister Johnson’s new Special Advisor, Dominic Cummings, is pushing the government to prepare for the UK to exit the EU on October 31st, “no ifs, not buts”.

According to The Guardian newspaper, Mr. Cummings is threatening civil servants with the sack, if they’re not working flat-out on Brexit by Halloween.

In particular, Mr. Cummings has said that, even if Parliament votes down Mr. Johnson’s government in a vote of ‘No Confidence’, the Prime Minister can remain in power, to achieve a ‘No Deal’.

This is because, following a technicality in the UK constitution, the legislation doesn’t actually say that, if Mr. Johnson loses a vote of ‘No Confidence’, that he has to resign. This is weakening the value of sterling.

EUR to GBP Exchange Rate Rises, as MPs Work to Stop ‘No Deal’ Brexit

However, were the Prime Minister to remain in power after losing a vote of ‘No Confidence’, it would break centuries of convention. This would be highly controversial among MPs, and could cause a UK constitutional crisis.

So given that Mr. Cummings is pushing strongly for Brexit by October 31st, come what may, many MPs in the House of Commons are now working to prevent this.

For example, several MPs are preparing a plan in which, rather than Parliament breaking up in September as normal, for party conference season, the House of Commons would remain in session.

This would give Parliament an extra three weeks to pass legislation to prevent Mr. Johnson achieving a ‘No Deal’ Brexit, rather than Parliament going into recess over the Autumn.

Another idea that’s been reported is a so-called “government of national unity”. In this case, were Mr. Johnson to lose a vote of ‘No Confidence’, then the opposition Labour Party would form an alliance with the other opposition parties, plus rebel Conservative MPs, to form an alternative government.

The sole aim of this temporary government would be to further extend the UK’s Brexit deadline, reports the Financial Times newspaper.

However, even Tory MPs that oppose a ‘No Deal’ Brexit are cautious about the idea of helping Labour leader Jeremy Corbyn become Prime Minister.

Moreover, Labour’s Shadow Chancellor, John McDonnell, said in Edinburgh yesterday that, if Mr. Johnson loses a vote of ‘No Confidence’, then he’d prefer to set up a minority Labour government than a “government of national unity”, according to The Telegraph newspaper.

With this in mind, several MPs are working on plans to prevent a ‘No Deal’ Brexit. For example, yesterday Labour MP Peter Kyle said that:

“If government acts unconventionally and flouts the sovereign power of Parliament, Parliament will rise to the challenge and if they break the rules, we will make new rules.” So it’s by no means a certainty that there’ll be a ‘No Deal’ Brexit.

However, these debates and plans around Westminster have weakened the pound, because they contribute further to the UK’s political uncertainty.

With less than three months to go before the UK’s Brexit deadline on October 31st, it’s not yet clear on what terms the UK will exit the EU, if there’ll be a second Brexit extension, or even a general election. This is weighing on sterling too.

Euro to Pound Rate Could Be Affected, as US/China Trade War Slows Eurozone

However, looking forward, the euro to pound interbank exchange rate could be affected, because the USA’s and China’s trade war is weighing increasingly heavily on the Eurozone’s economy.

In particular, since Washington and Beijing began imposing tariffs on each other in the second half of 2018, the Eurozone’s economy has slowed notably, and especially Germany’s.

To start with, Germany’s industrial production fell by -5.2% in June compared to a year ago, said Germany’s government statistics agency Statistisches Bundesamt Deutschland yesterday.

Meanwhile, investor confidence in the Eurozone dropped to -13.7 this month, said economics surveyors Sentix this Monday 5th August, well below forecasts for -7.7, plus July’s result of -5.8.

In addition, the Eurozone’s GDP (Gross Domestic Product) expanded by just +0.2% in Q2, between April and June, said the European Commission (EC) recently. This compares to +0.4% growth in the first three months of this year, so is a notable slowdown.

For 2019, the EC now predicts that the Eurozone will grow by +1.2%, down from +1.8% in 2018, plus +2.3% in 2017.

So there’s clear data that the Eurozone economy has decelerated since the second half of last year, and before then. In part, this is because the USA’s and China’s trade war has made Eurozone companies, and especially German firms, increasingly nervous.

This is because Germany’s growth model depends on exports, so Germany is more open to slowdowns in the global economy.

Since US President Donald Trump and Chinese Premier Xi Jinping began their trade dispute, many German companies have become less confident about making new investments, setting up new factories, or hiring new staff.

This is because Germany’s and the Eurozone’s company owners aren’t sure if, tomorrow, the USA or China will announce new tariffs, thus making doing business more expensive.

As a result, Stephen Gallo at BMO Capital Markets notes that: "We feel that the costs of "Eurozone survival" are increasing and will be reflected in some combination of political tension, EUR weakness and limited nominal GDP growth."

This is to say that the USA’s and China’s trade war could put pressure on the currency bloc’s survival, as economic growth continues to slow.

Germany’s central bank, the Bundesbank, forecasts that the Germany economy contracted in Q2. In addition, the economic releases for Q3 so far suggest that this trend has continued, so Germany may enter recession.

Moreover, economists think that it’s possible that the Eurozone’s +0.2% growth for Q2 could be downgraded, when the statistics are released on August 15th. This may influence the value of the euro in future.

Euro Vs Pound Could Be Influenced, if ECB Cuts Interest Rates and Extends QE

Furthermore, another factor that might influence the euro to pound interbank exchange rate, looking forward, is if the European Central Bank (ECB) cuts interest rates and extends quantitative easing (QE), its extraordinary monetary stimulus.

These measures could affect the euro, because they’d signal that the Eurozone needs greater monetary support to continue to expand.

The ECB looks likely to cut interest rates below their current 0.0%, and extend QE, first because the Eurozone’s economy is slowing.

For example, ECB President Mario Draghi said at the central bank’s interest rate decision in July that the currency bloc’s growth outlook is “getting worse and worse”, reports respected financial news source Bloomberg. This might compel the ECB to cut interest rates, to prop up the Eurozone’s GDP.

A second reason why the Eurozone’s central bank could cut interest rates and extend QE later this year, is because they strongly suggested that they’d do so in July.

To be specific, Mr. Draghi said at the ECB’s press conference last month that he’s tasked staff members with considering the "options for the size and composition" for more monetary stimulus, known as QE.

The euro tends to weaken when the ECB adds QE, because this is when the central bank buys vast quantities of Eurozone government bonds. This is equivalent to injecting huge sums of money into the Eurozone’s financial system.

The goal is to make it easier for the Eurozone’s government to borrow money, to stimulate economic growth. However, QE simultaneously devalues the euro, because there are more euros in the financial system.

A third reason why the European Central Bank might cut interest rates in September is because the Eurozone’s inflation remains far below the central bank’s target of close-to-but-below 2.0%.

The ECB could reduce borrowing costs below 0.0%, to making it cheaper for people to repay their mortgages, or reduce their credit card debt. Again, this may stimulate growth, but weaken the euro.

With this in mind, be sure to see if the ECB cuts interest rates or extends QE in September. This might affect the value of the euro against 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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