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Pound Euro Exchange at 28-Week High, as Farage Won’t Contest Tory Seats

Market CommentaryPound Euro Exchange at 28-Week High, as Farage Won’t Contest Tory Seats
Pound Euro Exchange at 28-Week High, as Farage Won’t Contest Tory Seats
Sterling Vs Euro.

The pound to euro interbank exchange rate has hit 1.1675 in the last day. This is its highest in 28 weeks, or since May 8th.

By comparison, back on August 10th, British sterling was as low as 1.0646 versus the Eurozone’s common currency. So it’s since risen by over 10 cents, or by 9.66%.

This may benefit you, when you transfer money abroad to Spain or France, to emigrate to Barcelona or Paris for a work opportunity, or to make regular payments to a Eurozone supplier.

This is because, when you exchange currencies, you might get a higher euro total than if you’d done so in the past 28 weeks. In turn, this may make emigrating more affordable for you.

To stay up-to-date with the sterling vs euro interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, scroll down to the Latest Market Rates Widget, for this week’s interbank rates.

Also, to check what’s affecting the value of the pound against the euro on the interbank market recently, visit our GBP to EUR Exchange Rate Updates page. Here, click on the latest article.

One reason why the pound euro exchange has reached this 28-week high is because Brexit Party leader Nigel Farage has announced that he won’t contest Tory-held seats, at the UK election.

Another factor why sterling versus euro has strengthened is because the UK economy returned to growth over the Summer, said official statistics yesterday, thereby avoiding a recession.

However, looking to the next few weeks, the pound to euro interbank exchange rate may be affected, because the markets continue to watch the opinion polls closely, ahead of the UK election.

Sterling Vs Euro Hits 28-Week High, as Farage Won’t Challenge Tory-Held Seats

As I mention, one reason why the pound euro exchange on the interbank market has hit this 28-week high in the last day is because, yesterday, Brexit Party leader Nigel Farage announced that he won’t contest Conservative-held seats, at the UK’s forthcoming general election, on December 12th.

It’s thought that this simplifies the UK election outlook, thereby strengthening the pound.

In particular, Mr. Farage said on Monday 11th that his party won’t challenge the 317 seats that the Conservatives won at the last general election, in 2017, reports The Guardian newspaper.

According to the Brexit Party leader, this is to increase the odds that the Tories win a majority at next months’ vote. Mr. Farage wants the Tories to pass their Brexit deal, and to prevent Labour or the Liberal Democrats gaining seats.

For the financial markets, Mr. Farage’s announcement is positive, because it simplifies the UK’s election outlook.

After all, if there’s one less political party standing in 317 constituencies, this makes it easier to predict who may win the December 12th vote, compared to if Mr. Farage were contesting the Tories across the country. In general, markets prefer stability and predictability.

For example, Edward Bell, an analyst with Emirates NBD, says that "This will likely help to build support for the Conservatives ahead of the December election as they won’t need to fight off challenges from hard Brexit supporting candidates.”

“Farage will instead target anti-Brexit parties such as the Liberal Democrats and Labour in certain constituencies,” adds Mr. Bell. So this has lifted sterling.

Following Mr. Farage’s announcement, the world’s money managers have lifted the odds that there’ll be a Conservative majority government on December 13th to 60%, from 40% last Friday.

This is because, if Mr. Farage doesn’t contest the Conservatives, the Tories may find it easier to hold their existing seats, than if they were facing an additional challenge from the Brexit Party.

The financial markets want the UK to have a stable, majority government, because this will provide clarity and consistency to the UK’s economic and political policies.

In turn, this helps the world’s investors to estimate the return on investment they’ll receive for placing money in the UK. So this news that Mr. Farage won’t contest the Tories has helped lift the value of sterling.

Pound Euro Exchange Gains, as UK Economy Returns to Growth Over The Summer

In addition, another factor why the pound to euro interbank exchange rate has hit this 28-week high in the last day is because the UK economy returned to growth over the Summer, said official statistics yesterday.

According to the Office for National Statistics (ONS) on Monday 11th, UK GDP (Gross Domestic Product) rose by 0.3% in Q3, from the three months of July to September, according to the BBC.

This follows the UK economy’s shrinking by 0.2% in Q2, from April to June. So as a result of this positive growth in Q3, the UK has avoided a technical recession, defined as two quarters of consecutive negative growth.

In particular, UK GDP expanded over the Summer, because of strong growth in July. This was led by the UK’s services sector, which makes up 80% of UK GDP.

For example, the ONS said following yesterday’s release that “GDP grew steadily in the third quarter, mainly thanks to a strong July. Services again led the way with construction also performing well.”

Meanwhile, Kallum Pickering, an economist with Berenberg, pointed to "A rebound in exports, stable gains in household consumption, and a continued pickup in government spending.”

Sterling historically tends to rise in value when UK GDP grows, because this points to a healthy, growing economy. In turn, this increases the number of investment opportunities available in the UK, whether for existing businesses or new ventures.

In turn, this encourages the financial markets to buy the pound, to make the most of these opportunities. So this increases sterling’s value.

GBP to EUR Rate Could Be Affected, as UK Economy Expands Below Forecasts

However, looking forward, the sterling vs euro interbank exchange rate may be influenced, because even though UK GDP returned to growth in Q3, the figures were below forecasts.

In addition, it’s worth noting that, on a year-on-year basis, the UK economy grew by 1.0% over this Summer, the slowest pace since 2010. In part, this suggests that Brexit uncertainty is weighing on the economy.

To be specific, even though UK GDP grew by 0.3% from July to September, said the ONS yesterday, markets had pencilled in 0.4% growth. Moreover, on a yearly basis, the UK economy expanded the least since the tail end of the financial crisis.

So even though the UK economy has avoided a technical recession, these data point to just middling economic growth.

Kallum Pickering, economist with Berenberg, says that "Intensifying Brexit uncertainties over the last three years have gradually eroded the UK’s underlying growth momentum. After averaging 0.6% in 2015, the average quarterly pace of growth has slowed each year since then."

So this demonstrates that the UK economy has steadily slowed, since the Brexit referendum in June 2016.

Furthermore, yesterday we learnt that UK manufacturing production fell by 0.4% in September, beyond predictions for a 0.3% decline. Meanwhile, the UK’s trade deficit expanded to minus £3.36 billion in September, below forecasts for minus £1.76 billion.

This also points to faltering UK economic momentum, heading into the last months of 2019, which could influence sterling’s value.

Pound Versus Euro Rate May Be Influenced, as UK Election Uncertainty Continues

Moreover, it’s worth adding that, just because the Brexit Party’s Nigel Farage has announced that they won’t contest Conservative-held seats next month, the result of the UK’s general election remains up-in-the-air.

In particular, Mr. Farage’s party will still field candidates at Labour- and Liberal Democrat-held swing seats, which could affect the result of next month’s important vote.

To explain, what with four main political parties contesting at December 12th’s election, it’s thought to be unusually difficult to predict who’ll triumph.

In addition, recent polls have shown that the British voting public is now more willing than in the past to switch votes, to support different political parties. This adds further unpredictability to who’ll soon inhabit No. 10 Downing Street.

For example, Erik Nelson, a strategist at Wells Fargo, says that "There could be a minority government, perhaps led by the Conservatives, that is unable to pass the [Brexit deal], or it is possible that no government at all can be formed following the December election.”

“Further gridlock is a clear and present risk for the UK economy and financial markets,” adds Mr. Nelson. This uncertainty may weigh on GBP.

According to the latest opinion polls, the Conservatives stand at 38%, ahead of the official opposition Labour Party’s 27%. Traditionally, a 10% lead has been enough to grant the winning party a majority in Parliament.

However, what with the presence of the Brexit Party, and the public likelier to switch votes, it’s difficult to say who’ll form the next government, which could affect sterling.

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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 Contact Us.

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