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Pound Euro Exchange at New 6-Month High, as Tories Extend Lead

Market CommentaryPound Euro Exchange at New 6-Month High, as Tories Extend Lead
Pound Euro Exchange at New 6-Month High, as Tories Extend Lead
Pound Euro Exchange.

The pound to euro interbank exchange rate stands at 1.1717 today. This is its highest in six months, or since May 6th.

By contrast, back on August 10th, sterling was as low as 1.0646 versus the Eurozone’s common currency. So it’s since risen by 10.06%, or by over 10.5 cents.

This may benefit you, when you transfer money to Spain or France from the UK, because you might get a higher euro total, compared to if you’d exchanged currencies in the last six months.

In turn, this could make it more affordable for you, if you’re buying property abroad on the Costa del Sol or in the Dordogne, or if you’re making international payments to a Eurozone company.

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’ to see this week’s interbank rates.

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

One reason why the pound to euro interbank exchange rate has hit this new six-month high, is because the Conservative Party has further extended its electoral lead, say the latest polls.

However, looking to the next month, sterling’s value versus the euro could be affected on the interbank market, because it’s still thought that this UK election is particularly tough to predict.

In addition, looking to this week, the GBP to EUR interbank exchange rate may be influenced, by key UK and Eurozone economic data, including the Bank of England’s Inflation Report Hearings.

Sterling Vs Euro Hits New 6-Month High, as Tories Extend Poll Lead

As I mention, one reason why the pound to euro interbank exchange rate has hit this new six-month high today is because the Conservative Party has increased its lead against the UK’s other political parties in the opinion polls.

This is ahead of the UK’s general election in just over three weeks, on December 12th. As a result, this could bring the UK a stable, majority government.

To be specific, according to trusted pollster YouGov’s poll for November 16th, the Tories stand at 45%. This is 3% higher than YouGov’s previous survey on November 8th, when Prime Minister (PM) Boris Johnson’s party was at 42%.

Moreover, the main opposition Labour Party has remained constant at 28%, says YouGov. This means that the Tories’ lead has increased by 3%, up to 17%.

The financial markets believe that YouGov’s polls are especially significant, because YouGov was the only company to accurate predict 2017’s general election result.

Back then, former PM Theresa May’s poll lead fell from 17% to 2% in a matter of weeks. This left Mrs. May without a majority of MPs in Parliament, and dependent on Northern Ireland’s Democratic Unionist Party.

So sterling has risen following YouGov’s latest survey, first because investors have special confidence in YouGov’s polls.

Second, it’s traditionally the case that, if the first-place political party has a lead of 10% over its nearest opponent, this grants the winning party a majority of MPs. This enables that party to form a stable government, without depending on smaller parties to pass laws.

In particular, it’s thought that the Tories’ lead in the polls has widened, because last week, we learnt that Nigel Farage’s Brexit Party won’t compete with the Conservatives for many seats.

Mr. Farage has announced that he won’t field candidates in the 317 seats that the Tories won in 2017, nor in 43 seats where the Conservatives came second last time, lifting the odds of a Tory majority.

It’s thought that, if Mr. Farage’s Brexit Party doesn’t compete with the Conservatives, this increases the probability of a Tory majority, because the so-called ‘Leave’ vote won’t be split.

This is to say, people who voted ‘Leave’ in the 2016 Brexit referendum will only have the Tories to vote for, rather than Mr. Farage’s party too.

This has strengthened the pound, because the financial markets generally want the UK to have a stable, majority government. After all, this will provide clarity about the UK’s future Brexit stance, as well as the UK’s economic and political direction.

This could give reassurance to British businesses, encouraging them to hire and invest, and so supporting the UK’s economic growth.

For example, Paul Meggyesi, an analyst with JP Morgan, says that "The most bullish scenario for GBP given our assessment of these issues is likely to be a large Conservative majority, in line with the current opinion polls.”

“Yes this would deliver Brexit but [PM] Johnson would have the political wiggle room to slowly dilute the relatively hard Brexit currently envisaged,” adds Mr. Meggyesi. So this has boosted sterling.

Pound Euro Exchange Rate May Be Affected, as UK Election Result Uncertain

However, looking over the next three weeks or so, the sterling vs euro interbank exchange rate could be influenced, because it’s still thought that the UK election is particularly difficult to predict.

This is in spite of the fact that the Conservatives have increased their opinion poll lead, according to YouGov’s latest survey. So this uncertainty could affect sterling up to the December 12th vote.

It's thought that this UK general election is especially tough to forecast, first because, as I mention, in 2017 former PM Theresa May fell from a 17% poll lead to 2% in only a few weeks.

This suggests to the financial markets that, even with a seemingly solid advantage in the polls, the leading party can fall behind, to surprisingly lose their majority of MPs in the House of Commons.

Second, this December 12th UK general election is considered up-in-the-air, because the British voting public is apparently more willing to switch votes than in the past.

For example, an ICM survey earlier this month revealed that over 10% of people who voted for the Tories or Labour in 2017 are now thinking of voting Liberal Democrat or Brexit Party. This complicates the outlook.

Thirdly, this UK election is considered unpredictable, because of the UK’s First Past the Post (FPTP) electoral system. Under FPTP, there’s no proportional representation, with MPs assigned equal to the percentage of votes that each party wins.

Instead, the party with the most votes “takes all” and becomes the MP, even if in total over half of votes went to other parties. So this adds a degree of uncertainty to the results.

Fourthly, the financial markets are cautious about next month’s election, because it’s thought that there are a high number of “swing seats”.

This is when only a relatively small number of people have to switch votes to another political party, for that party to win. In other words, the incumbent MPs’ majority is small. This could shift the make-up in Parliament on December 13th too.

For example, Oliver Harvey, strategist at Deutsche Bank, says that "We would be concerned that if polls begin to narrow, the market might begin to fret about the unappealing prospect of another hung parliament, as was the case a little over two years ago."

“This is before one takes into account the unusual time of year and extraordinarily fragmented political landscape” for the general election, adds Mr. Harvey.

Looking to this week, PM Johnson and Labour Party leader Jeremy Corbyn will go head-to-head, in an ITV debate, to be held tomorrow at 20.00 GMT. In addition, over the course of this week, the political parties will officially unveil their campaign manifestos.

These events have the potential to effect the opinion polls, leading up to December 12th’s vote, and may affect the sterling vs euro interbank exchange rate.

GBP to EUR Rate Could Be Influenced, by UK/Eurozone Economic Releases

Moreover, the pound euro exchange rate on the interbank market could also be affected this week, by key UK and Eurozone economic releases.

These have the potential affect the value of sterling vs euro, because they update us about the UK’s and the Eurozone’s economic health, such as business activity, interest rate outlook, or central bank executives’ views and analyses, according to FX Street.

To start with the UK, this Wednesday 20th the UK’s central bank, the Bank of England (BoE), releases its Inflation Report Hearings.

This may tell us whether the BoE is further considering cutting UK interest rates below their current 0.75%, following the BoE’s hints earlier this month. This may be the case, because UK inflation fell by 0.2% in October, to 1.5%, further below the BoE’s 2.0% target.

Sterling historically weakens when the BoE reduces interest rates, because this makes it less profitable for the world’s money managers to invest in GBP-denominated assets.

In turn, in these circumstances the financial markets tend to sell the pound, to buy alternative currencies where interest rates are higher, such as America’s 1.5-1.75%. When they sell sterling, its value declines.

Turning to the euro area meanwhile, this Friday 22nd we learn both Germany’s and the Eurozone’s composite PMIs (Purchasing Managers’ Indices) for November.

These closely-watched surveys measure activity in the bloc’s vast services and manufacturing sectors. Germany’s activity is forecast to contract again this month, although it’s thought the wider Eurozone continues to expand slightly.

If both the Eurozone and Germany exceed or disappoint expectations, this may affect the European Central Bank’s (ECB) future interest rates outlook. Already the ECB’s interest rates stand at an all-time low of 0.0% pointing to amble monetary accommodation.

Also, this Friday at 08.30 GMT, new ECB President Christine Lagarde delivers a speech, which could affect the value of the euro too.

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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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