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Pound Euro Exchange at 31-Month High, on Chances of Tory Win

Market CommentaryPound Euro Exchange at 31-Month High, on Chances of Tory Win
Pound Euro Exchange at 31-Month High, on Chances of Tory Win
Pound Euro Exchange.

The pound to euro interbank exchange rate stands at 1.1860 today at the time of writing. This is its highest in 31 months, or since May 11th 2017.

By comparison, back on August 10th 2019, the sterling vs euro interbank exchange rate was as low as 1.0646. So it’s since risen by 11.4%, or over 12 cents.

This could benefit you, if you’re buying property abroad on the Costa del Sol or the Cote d’Azur, because you might get a higher euro total compared to the last 31 months.

In turn, this might increase your total in euros, when you transfer money to Spain or France from the UK, or if you’re making international payments to the Eurozone for your UK business.

To stay updated with the pound to euro interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, scroll down to the Latest Market Rates Widget, to see this week’s interbank rates.

Also, to find out what’s affecting the value of sterling vs euro on the interbank market, go to our GBP to EUR Exchange Rate Updates page. Here, simply click on the most recent article.

One reason why the GBP to EUR interbank exchange rate has hit this 31-month high is because the markets increasingly think that the Tories will win a majority at next week’s UK election.

In addition, another factor why the pound has strengthened against the euro on the interbank market is because the UK services sector’s activity for November has been revised higher.

However, turning to the week left until the UK’s general election, the sterling vs euro interbank exchange rate might be influenced, if the polls start to show that the result won’t be decisive.

Sterling Vs Euro Hits 31-Month High, as Markets Factor in Tory Election Win

As I mention, one reason why the pound to euro interbank exchange rate has hit this 31-month high of 1.1860 today is because the financial markets are increasingly factoring in the probability that the Conservative Party will win next Thursday 12th December’s UK general election.

If a single political party wins next week’s vote, it’s thought that this may add to the UK’s stability in 2020.

The world’s money managers increasingly think that the Tories will win a majority of MPs in Parliament at next week’s vote, because the opinion polls consistently show a Conservative lead.

For example, according to Britainelects’, the Financial Times’ and the BBC’s “poll of polls” this week, the Tories stand at 42% support, 10% ahead of the opposition Labour Party’s 32% support.

Moreover, according to ComRes’ newest survey, the Tories stand 10% ahead, while YouGov puts Prime Minister Boris Johnson’s party 9% in front. Based on these results, Electoral Calculus forecasts that the Conservatives may win a majority of 48 MPs next week.

Overall, the Conservatives might win 349 MPs, Labour 232 MPs, and the Liberal Democrats 15 MPs.

What with the latest polls pointing to a Tory victory next Thursday, global investors have lifted the probability that the Conservatives will win a majority by 5% from earlier this week, to 70%.

This suggests more than a 2/3rds likelihood that a single political party will win at the ballot boxes. In turn, this may contribute to the UK’s economic and political stability, looking to next year.

For example, Kim Mundy, a strategist with CBA, says that "Opinion polls suggests that the Conservative party is on track to win a majority at UK general election.”

Meanwhile, Neil Wilson, analyst with Markets.com, says that "The dam has burst and a considerable amount of pent-up demand has been unleashed – the market seems to be betting that the Tories have an unassailable lead.”

In general, the financial markets want a single party to win next week’s vote. This is because, this way, it’s thought that Brexit will at long last be finalised faster.

In addition, the UK can start to negotiate its future trade deal with the EU, while working on its domestic priorities like schools and hospitals. All in all, this may accelerate the UK’s economic growth in 2020, thus lifting sterling.

GBP to EUR Rate Gains, as UK Services Activity Revised Upward for November

Furthermore, another factor why the sterling vs euro interbank exchange rate has reached this 31-month high today is because the UK services sector’s activity for November has been revised higher, said trusted economics data yesterday.

This has supported the pound, because it partly reduces the odds that UK GDP (Gross Domestic Product) will contract, at the end of this year.

According to economics watchdog IHS Markit on Wednesday 4th December, the UK’s services PMI (Purchasing Managers’ Index) for last month was revised up to 49.3, reports FX Street.

This is 0.7 points above IHS Markit’s “flash” estimate of UK services activity for November, released late last month, of 48.6. So this tells us that UK services activity for last month was greater than previously reported.

Importantly, this UK services PMI of 48.6 remains below the 50.0 figure that signals economic growth. So this tells us that the UK’s services sector, which makes up 80% of UK GDP, may have contracted from the UK’s economic expansion in Q4 2019.

However, on the other hand, it’s believed that IHS Markit’s PMIs consistently under-report the level of UK economic growth recently.

For example, Ruth Gregory at Capital Economics says that “Admittedly, the PMIs have under-estimated quarterly GDP growth by an average of 0.2% over the past four quarters."

With this in mind, even if November’s UK services PMI were to signal a minus 0.2% contraction from October to December, in Q4 2019, the UK’s actual GDP growth might still be 0.1%, or flat at 0.0%.

Moreover, IHS Markit’s upgrade of November’s UK services PMI suggests that the largest sector of Britain’s economy is resisting the Brexit uncertainty better than previously thought.

According to the accompanying report, the fall in current activity was “marginal”, in spite of the fact that Brexit has been delayed three times, while the UK is in the midst of a general election campaign.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says that “The PMI, therefore, appears to be excessively downbeat during periods of political uncertainty.”

“We still look for a 0.2% quarter-on-quarter increase in GDP in Q4, and no [interest rate cuts from the Bank of England] over the next six months,” adds Mr. Tombs. So this upwardly revised data has contributed to boost sterling.

Pound Euro Exchange Rate Might Be Influenced, if UK Election Polls Shift

However, looking to the week remaining until the UK’s general election next Thursday, the sterling vs euro interbank exchange rate might be affected, if the opinion polls shift.

In particular, if the gap between the Tories and opposition Labour party shrinks, financial markets may grow concerned about the risk of a ‘hung’ Parliament, in which no single political party wins a majority of MPs.

After all, although the world’s money managers factor in a 70% chance that the Conservatives will be able to form a stable government next week, there’ still a 30% chance to the contrary.

In this case, even if a government is formed, it might struggle to command the confidence of the House of Commons, have to pact with other parties to pass laws, or be subject to further deadlock.

In particular, if there’s a ‘hung’ Parliament, then the UK’s domestic legislative and Brexit limbo could continue. This is because a majority of MPs may again decline to pass PM Johnson’s draft deal with the EU.

If this happens, the UK could run up against its current Brexit deadline of January 31st 2020, increasing the risk of ‘No Deal’ or having to ask Brussels for more time to negotiate.

Global investors remain aware of the risk of a ‘hung’ Parliament, because although the Tories’ lead stands at 10% in many polls, it’s thought that ‘hung’ Parliament territory is a 7% lead.

With this in mind, PM Johnson’s party only has to fall by 3%, or Jeremy Corbyn’s Labour party gain by 3%, over the next week, for the result of next Thursday’s election to become much less clear.

For example, Ranko Berich at Monex Europe says that "Caution should be taken in reading too much in to the past 24 hours and Sterling’s rally. The size and timing of any Sterling rally is highly uncertain.”

Meanwhile, Steven Swinford, Deputy Political Editor at The Times, reports that PM Johnson is trying “to galvanise his party amid evidence that its lead is narrowing”. So over the next week, this may 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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