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Pound Euro Exchange at 5-Week High, as MPs Block ‘No Deal’

Market CommentaryPound Euro Exchange at 5-Week High, as MPs Block ‘No Deal’
Pound Euro Exchange at 5-Week High, as MPs Block ‘No Deal’
Pound Euro Exchange.

The pound to euro interbank exchange rate has hit 1.1172 today. This is its strongest in over five weeks, or since July 26th.

By comparison, back on August 10th, sterling was as weak as 1.0646 versus the common currency. So it’s since risen by +4.94%, or by over +5 cents.

This may benefit you, if you’re a Briton buying property abroad in Spain or France, or you’re a British business owner making international payments to the Eurozone to import products.

This is because, when you exchange pounds for euros, you might now get a higher euro total, compared to if you’d transferred money abroad in the past five weeks.

In turn, this might make it more affordable for you to purchase Spanish or French real estate, or cut your currency for your business costs to ship Eurozone goods to the UK.

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

Also, to check what’s influencing the value of sterling against the common currency, visit Pure FX’s GBP to EUR Exchange Rate Updates page. Here, click on the most recent article.

A first reason why the pound to euro interbank exchange rate has reached this five-week high is because, yesterday, MPs in Parliament voted to prevent a ‘No Deal’ Brexit.

However, looking to the foreseeable future, sterling’s value against the euro could be affected, because it’s increasingly likely that the UK will hold a general election sometime in 2019.

In addition, looking forward, the sterling vs euro interbank exchange rate might also be influenced, because there’s growing evidence that the UK might be entering a recession.

Let’s look more closely at these reasons why the pound to euro interbank exchange rate has hit this five-week high today. This could benefit you, for when you transfer money abroad.

Pound Euro Exchange Reaches 5-Week High, as MPs Vote to Prevent ‘No Deal’

As I mentioned, a first reason why the pound to euro interbank exchange rate has reached this five-week high is because, yesterday, MPs in Parliament voted to block a ‘No Deal’ Brexit.

This has strengthened the pound on the currency markets, because it’s thought that this makes it likelier that the UK will eventually exit the European Union with an agreement.

Yesterday, on Wednesday 4th September, MPs in the House of Commons voted by 329 to 300 to prevent a ‘No Deal’ Brexit. As a result, the bill will now continue its passage through Parliament to the House of Lords, where it’s expected to pass, then to the Queen, for Royal Assent, reports the BBC.

The bill obliges Prime Minister (PM) Boris Johnson to request a second extension to the UK’s Article 50 Brexit deadline.

Mr. Johnson’s defeat on Wednesday follows his loss on Tuesday too, in which rebel Conservative MPs voted with the opposition to take control of Parliament’s agenda from the government.

As a result, Mr. Johnson is the first PM to lose his first votes in Parliament since 1894. The PM has expelled the 21 Tory MPs who voted against him, and he now leads a minority administration.

It’s worth noting that another Conservative MP voted with the opposition yesterday, Caroline Spelman, in addition to the 21 MPs who rebelled against the government on Tuesday.

These included many senior Conservatives and former ministers, such as ex-Chancellor Philip Hammond, grandee Kenneth Clarke, as well as former Attorney General Dominic Grieve.

If and when the bill blocking a ‘No Deal’ Brexit becomes law, the PM will be obliged to return to Brussels, to ask to extend Article 50. It’s thought that opposition MPs wish to extend the UK’s Brexit deadline by another three months, up to January 31st.

This will give MPs time to decide what sort of Brexit they want, and with increasing likelihood, to call a general election.

Following Mr. Johnson’s defeat yesterday, he tabled a motion seeking a general election. Under the UK’s Fixed Terms Parliament Act, this requires 2/3rds of MPs to back the motion, otherwise an election can only be called every five years.

However, now that opposition MPs have the initiative, they want to ensure that the bill blocking ‘No Deal’ becomes law, before voting for an election.

In particular, only 298 MPs voted for Mr. Johnson’s motion calling for a general election yesterday, 136 MPs short of the 2/3rds majority required, according to The Guardian newspaper.

In the meantime, the PM will lead a minority government, in which he’ll require the backing of opposition MPs to pass laws. This may oblige Mr. Johnson to compromise to pass legislation, or do little until a general election is called.

Opposition MPs’ victory yesterday has strengthened the pound, because when a ‘No Deal’ Brexit is blocked, it’s thought likelier that the UK will retain closer economic and political ties to the EU after Brexit.

Given that the EU is our closest trading partner, and we do roughly half our international trade with the continent, a Brexit agreement may foster the UK’s economic growth.

GBP to EUR Could Be Affected, as UK General Election in 2019 Looks Likelier

However, looking forward, the sterling vs euro interbank exchange rate might be influenced, because it’s thought probable that there’ll be a UK general election later this year.

This may sway the value of the pound against the common currency, because general elections contribute to the UK’s political uncertainty, at a time when there’s already a lack of clarity surrounding Brexit.

It’s probable that there’ll be a UK general election in 2019 because, as I mention, opposition MPs have said that they’ll support PM Johnson’s calls for an election, once the bill blocking a ‘No Deal’ Brexit becomes law.

The opposition, including Labour and the Liberal Democrats, want to hold an election, to win more MPs in the House of Commons, and have the opportunity to govern.

For example, Sir Keir Starmer, Labour's Brexit spokesman, emailed Labour supporters yesterday to say that Labour will vote for an election: "as and when the anti-'no deal' legislation is on the statute book", reports The Evening Standard.

Meanwhile, Labour leader Jeremy Corbyn said on Tuesday: “He [Boris Johnson] wants to table a motion for a General Election. Fine: get the bill through first, in order to take no-deal off the table."

However, while both the Conservatives and Labour now want to hold a general election, to win a Parliamentary majority, this adds to the UK’s political confusion.

This is because, though Mr. Johnson and Mr. Corbyn might feel confident of victory, there’s no telling who’d win at the polls, nor what policies they’d implement when in power, nor what sort of Brexit they’d pursue.

For example, while the Conservatives lead in the polls at present, it’s unclear whether they’d win enough votes to govern independently.

Instead, the Tories might have to renew their alliance with Northern Ireland’s Democratic Unionist Party (DUP), or even form a coalition with Nigel Farage’s Brexit Party. In this case, it’s likely that there’d ultimately be a ‘hard’ Brexit or ‘No Deal’.

Alternatively, if Jeremy Corbyn’s Labour Party does better than the polls suggest, and they win a majority, Labour is likelier to pursue a ‘soft’ Brexit.

However, Mr. Corbyn is an old-fashioned Socialist, so if he becomes Prime Minister, he’s likely to raise taxes, renationalise several industries, and introduce regulations that may stifle business innovation and economic growth.

For example, Andrew Wishart, UK Economist at Capital Economics, said yesterday that a Labour government could “introduce lots of anti-business policies. The anti-business policies (such as high taxes and nationalisation) that Labour could introduce, if not constrained by a coalition partner, would probably result in the economy being weaker over a number of years."

This may affect the value of sterling vs euro on the interbank market, because financial markets dislike uncertainty in general.

Investors prefer it when there’s a stable government with clear policies and a predictable outlook, because this helps investors to estimate their return on investment. So the rising probability of a UK general election this year might influence the pound.

Sterling Vs Euro Might Be Influenced, as UK Services Weaken in August

In addition, looking to the foreseeable future, another factor that might affect the pound to euro interbank exchange rate is the fact that the UK’s dominant services sector weakened further in August, said trusted statistics yesterday.

This could affect the value of sterling, because this increases the probability that the UK could enter a recession later this year.

According to economics watchdog IHS Markit on Wednesday 4th September, the UK’s services PMI (Purchasing Managers’ Index) fell to 50.6 last month.

This was below financial market forecasts for 51.0, as well as July’s result of 51.4. Moreover, it’s closer to the 50.0 figure that separates economic growth from contraction, so points to declining services sector activity.

This was UK services’ poorest result since 2008, during the global financial crisis 11 years ago. In addition, business optimism is at its lowest level for more than three years, said IHS Markit, when the UK first voted for Brexit.

In particular, rising staff wages, fuel costs and utility bills are causing service sector firms’ costs to increase, thereby reducing profit margins.

It’s worth noting that the UK’s manufacturing and construction sectors both shrank again in August, while UK GDP (Gross Domestic Product) already fell by -0.2% in Q2, between April and June.

As a result, were the UK economy to contract again in Q3, between July and September, we’d enter a technical recession. This would be the UK’s first since the global financial crisis.

For example, Chris Williamson, Chief Business Economist at IHS Markit, says that these data indicate that UK GDP will shrink by -0.1% in Q3, according to FX Street.

Mr. Williamson said: “After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession.”

This may affect the pound, because were the UK to enter recession, this would suggest that the continuing Brexit uncertainty is weighing noticeably on households’ and businesses’ confidence.

What’s more, when the UK’s GDP declines, this makes investing in GBP-denominated assets less profitable for the world’s money managers, thereby dragging down demand for 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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