The pound to euro interbank exchange rate has risen by +0.89% in the last day, from 1.1649 up to 1.1753. This is sterling's highest level versus the euro in one week, since March 27th.
Moreover, the pound now stands just -0.24% below its highest against the euro in 22 months, or since May 14th 2017, of 1.1782.
A big reason why sterling has neared this 22-month high versus the euro today is because UK Prime Minister Theresa May has announced that she'll hold cross-party talks with Labour, to reach a Brexit deal.
To do this, Mrs. May will ask the EU for a second short extension to Article 50, the UK's Brexit negotiating timetable. It's hoped that this will mean that the UK will now pursue a "softer" Brexit.
Let's look further at what's influenced the value of sterling against the euro in the last day, and what could do so, looking ahead.
May Announces Cross-Party Brexit Talks with Labour
A clear factor why the pound euro exchange rate has risen in the past day is because UK Prime Minister Theresa May has announced that she'll hold cross-party talks with the opposition Labour Party, to reach a Brexit agreement, reports the BBC.
Yesterday evening, speaking at Downing Street, Mrs. May announced that she's "taking action to break the logjam" over Brexit.
To give the Prime Minister time to hold talks with Labour, she'll ask the EU for a second extension to the Brexit deadline. If the EU agrees, this means that the UK will stay in the EU beyond the current end date of April 12th.
Mrs. May's announcement follows a chaotic fortnight over Brexit in Parliament. Twice, MPs in the House of Commons have held "indicative votes" to decide which version of Brexit they want to pursue.
These votes included a Norway-style deal of staying in the EU's Customs Union and Single Market, a "No Deal" in which the UK would crash out, or even a second referendum. Yet so far MPs have voted against all these options.
In addition, to date Parliament has voted three times against the Withdrawal Agreement that the Prime Minister negotiated with the EU.
As a result, Mrs. May hopes that, by negotiating directly with Labour, she'll break the deadlock. In particular, while speaking at Downing Street yesterday, Mrs. May rejected the possibility of a "No Deal" Brexit, and said that leaving the EU with a deal is "the best solution".
In response to the Prime Minister's announcement, the leader of the opposition Labour Party, Jeremy Corbyn, said that he's "very happy" to meet Mrs. May. It's expected that a meeting between Mrs. May and Mr. Corbyn will be scheduled later today.
One reason why sterling has risen versus the euro is because it's believed that Labour wants to retain closer ties to the EU after Brexit. In the past, Mr. Corbyn has pushed for the UK to stay in a Customs Union with the EU after Britain leaves.
As a result, financial markets now feel more optimistic that the UK might pursue a "softer" Brexit, than if the Prime Minister had passed her draft Withdrawal Agreement. In turn, this might benefit the UK in future, given that Great Britain does roughly half its international trade with the EU.
The UK's business community greeted the news of the cross-party talks with cautious optimism. Carolyn Fairbairn, Director-General of the Confederation of British Industry (CBI), tweeted that the talks are "Welcome steps must be breakthrough not false dawn."
Meanwhile, the President of the European Council, Donald Tusk, tweeted that "even if, after today, we don’t know what the end result will be, let us be patient."
Mr. Tusk's tweet has spurred hopes that the EU will grant the UK its second Brexit extension. If so, this would suggest that the EU still feels good will toward the UK, and wants to reach a Brexit agreement. This too has contributed to strengthen the pound euro exchange rate.
Cross-Party Talks Raise Risk of General Election
However, it's important to note that, while sterling has risen versus the euro following Mrs. May's announcement, the Prime Minister's plan contains risks, both for the UK and the pound.
In particular, to hold cross-party talks with Labour, Mrs. May has had to go against the wishes of many members of her Conservative Party, who wanted the UK to pursue a "hard" Brexit or "No Deal" Brexit.
For example, following Mrs. May's speech yesterday, former Foreign Secretary Boris Johnson warned that the Prime Minister is "entrusting the final handling of Brexit to Labour".
In addition, the Conservative MP and leader of the pro-Brexit European Research Group (ERG), Jacon Rees-Mogg, said that "To allow the Labour party to run Brexit, to decide you'd rather be supported by a Marxist than by your own party, is unwise."
Also, a spokesman for Mrs. May's partners in Parliament, the Democratic Unionist Party, said that: "It remains to be seen if sub-contracting out the future of Brexit to Jeremy Corbyn, someone whom the Conservatives have demonised for four years, will end happily."
So, Mrs. May's decision is likely to exacerbate tensions among the Tory ranks. This could increase the likelihood that Conservative MPs attempt a leadership coup against Mrs. May.
In response, the Prime Minister might call a general election, to demonstrate that there's public support for any Brexit deal she negotiates with Labour, reports FX Street.
If Mrs. May calls a general election, it's likely to be right after she reaches a Brexit deal with Labour, and Parliament passes the agreement. This would be before the UK begins talks with the EU about their future trade arrangements.
As a result, it's difficult to say which political party would be in government a few weeks from today, or who'll be Prime Minister. Theresa May might win any election and lead the UK's future trade talks, or it could be another Conservative MP, or it could be Jeremy Corbyn.
This adds uncertainty to the UK's political and economic outlook. Financial markets dislike uncertainty, because it makes it hard to know where to invest their money, to get the highest return.
So even though the pound euro exchange rate has risen in the short term, following Mrs. May's decision, in the longer term, the uncertainty over whether there'll be an election could affect sterling too.
UK Factories Stockpile, German Manufacturing Shrinks
As well as Brexit, the pound to euro exchange rate is being influenced by the UK and Eurozone's ongoing economic performance.
On Monday 1st April, we learnt that the UK's manufacturing Purchasing Manager's Index (PMI) by IHS Markit, a respected gauge of British factory output, rose to 55.1 in March. This was far above financial market forecasts for 51.0, and easily beyond the 50.0 figure that signals growth.
However, IHS Markit reported that UK factories were increasing output, because businesses were stockpiling goods, ahead of Brexit. So while these upbeat production figures might contribute to UK economic growth in Q1, between January and March, UK manufacturing output could slow once there's greater Brexit clarity.
In addition, on Monday, IHS Markit reported that Germany's manufacturing PMI for March fell to 44.1, well into contraction territory. Germany's factory output is shrinking, as firms in Deutschland struggle to adapt to new EU emissions standards, and as America and China's trade war cuts international demand for goods.
Germany's manufacturing sector is the lynchpin of its economy, so these data raise the odds that Germany could enter recession in early 2019. Already, Germany's GDP only narrowly avoided shrinking in the second half of last year. Moreover, Germany is the Eurozone's largest economy, so this could weigh more widely on the bloc's economic growth this quarter.
Also at the start of this week, the Eurozone's official statistic agency, Eurostat, revealed that the bloc's Consumer Price Index (CPI) fell by -0.1% in March, to 1.4%. The CPI measures inflation, the pace at which prices are rising in the Eurozone on an annual basis. This 1.4% figure is well below the European Central Bank's goal of close-to-but-below 2.0%.
These figures suggest that the Eurozone economy remains too sluggish to consistently lift prices. This is because when the economy is slow, shopkeepers keep prices the same, to boost business. In turn, this puts less pressure on the European Central Bank to lift interest rates above their current all-time low of 0.0%. This could contribute to weaken the euro too.
However, it's important to note that, in spite of these economic updates, Brexit talks have been a dominant factor in the pound euro exchange rate, and look likely to remain so, looking ahead.
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