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Pound Euro Exchange Near 39-Month High, as Tories Win Election

Market CommentaryPound Euro Exchange Near 39-Month High, as Tories Win Election
Pound Euro Exchange Near 39-Month High, as Tories Win Election
Sterling Vs Euro.

The pound to euro interbank exchange rate stands at 1.2045 today at the time of writing. This is just 0.25% below sterling’s recent 39-month high versus the Eurozone’s common currency, its strongest since September 3rd 2016, reached last Friday 13th, at 1.2076.

By comparison, back on August 10th 2019, the pound was as weak as 1.0646 against the euro. So it’s since strengthened by 13.14%, or by close to 14 cents.

This could benefit you, if you’re a Brit buying property abroad on the Costa del Sol or the Cote d’Azur, or if you need currency for tuition fees, for your son or daughter to study in Europe.

This is because, when you transfer money to Spain or France from the UK, you might get a higher euro total, compared to if you’d exchanged currencies in the last 39 months.

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 affecting the value of the pound against the euro on the interbank market, go to our GBP to EUR Exchange Rate Updates page. Here, click on the most recent article.

One reason why the pound to euro interbank exchange rate stands near this 39-month high today is because the Conservatives have won a large majority of MPs, in the UK’s general election.

Another factor why sterling has strengthened in value against the euro is because it’s now thought that the UK economy could accelerate in 2020, as the Brexit uncertainty is at last clarified.

However, looking to next year, the sterling vs euro interbank exchange rate might be influenced, because the UK is set to negotiate its future trade deal with the EU, which may take a long time.

Sterling Vs Euro Near 39-Month High, as Tories Win Large Majority in UK Election

As I mention, one reason why the pound to euro interbank exchange rate stands near its 39-month high at 1.2045 today is because, last Friday 13th December, Prime Minister (PM) Boris Johnson’s Conservative Party won an unexpectedly large majority, at the UK’s general election.

This has lifted the pound, because PM Johnson now looks set to finalise the UK’s Brexit deal.

To be specific, last week the Tories won 365 seats, 66 more than at the last UK election in 2017. By comparison, the main opposition Labour Party won 203 MPs, 42 fewer than last time.

In the UK’s Parliament, there are 650 seats in total, so a first-place political party needs 326 to secure a majority. Overall, PM Johnson’s Conservatives have won a majority of 79 MPs, above forecasts.

According to YouGov’s trusted MRP (Multi-level Regression and Post-stratification) poll, released two days before the election, PM Johnson’s party was on course for a 28-seat majority.

So as a result, the Tories have a notably larger majority than the financial markets had expected. In turn, this could contribute to the UK’s political and economic stability in 2020, and to finish Brexit.

In particular, it’s reported that PM Johnson will introduce the legislation to ratify his already-agreed Brexit deal this week, before Christmas.

This looks virtually certain to be approved in the House of Commons, because during the election campaign, all of the PM’s Conservative candidates pledged to support the Brexit deal, if they were elected. So there’ll be no more deadlock.

As a result, the UK looks set to finalise Brexit before the current deadline of January 31st 2020, and avoid a “No Deal”.

This has strengthened the pound, because during the three-and-a-half years since the UK’s Brexit referendum, there’s been considerable uncertainty over whether Brexit would be finalised, when, and on what terms. So this is a relief to the financial markets.

For example, Ulrich Leuchtmann at Commerzbank says that "The possibility of a sustainable Sterling recovery is emerging very cautiously."

This is to say that, with the cloud of Brexit uncertainty removed from the UK’s outlook, and the likelihood that there’ll be a stable, majority government for the next five years, this bodes well for the UK in 2020. This has boosted sterling.

GBP to EUR Rate Supported, as UK Economy May Accelerate in 2020

Moreover, another reason why the sterling vs euro interbank exchange rate is supported near its 39-month high today is because, what with the UK election having delivered a clear result, and Brexit set to be finalised, the UK economy may accelerate in 2020.

In particular, UK GDP (Gross Domestic Product) may expand faster than if the result hadn’t been clear, or Brexit delayed again.

The UK’s GDP could grow faster next year, first because what with Brexit set to be ratified by Parliament, there’s greater clarity about the UK’s immediate relationship with the EU.

In turn, this could encourage British businesses to hire new employees and buy new equipment, because there’s increased certainty about the future. Since the Brexit vote, UK business investment has fallen.

In addition, Britain’s economic growth might accelerate in 2020, because PM Johnson’s government has pledged to significantly increase public spending.

For example, this includes investing £80 billion in the North of England, where the Tories won new constituencies last Friday. PM Johnson has also promised to invest in new hospitals, schools, as well as improve the UK’s rail network.

For example, Ulrich Leuchtmann at Commerzbank says that "What will be decisive long term is how Prime Minister Boris Johnson is going to use his new, clear majority."

So we’ll see if PM Johnson uses his large mandate, to significantly invest in the UK’s public infrastructure. It’s believed he will, because all the main political parties at this year’s vote promised an end to austerity.

Notably, the PM’s majority is large enough that he’s not dependent on small groups of MPs, such as the European Research Group (ERG) or Northern Ireland’s Democratic Unionist Party (DUP).

Prior to last Friday’s election, PM Johnson was governing with a ‘hung’ Parliament. Here, he didn’t have a majority of MPs, which enabled relatively few MPs to block or amend the government’s proposals.

With this in mind, Derek Halpenny at MUFG says that “Market participants are optimistic that the UK economy will rebound early next year after hitting stall speed in recent months and further boost the GBP.”

Overall, it’s forecast that the UK economy could expand by 1.8% in 2020 and by 2.1% in 2021, compared to just 1.3% in 2019. In turn, this has contributed to lift the pound too.

Pound Euro Exchange Might Be Affected, by UK/EU Future Trade Deal Talks

However, also looking to 2020, the pound to euro interbank exchange rate could be influenced, because the UK will start to negotiate its future trade deal with the EU.

This may affect the value of sterling, first because the UK currently has a tight negotiation schedule. Also, the results of the talks will impact the UK’s relationship with its biggest trading partner well into the future.

To begin with, at present the UK has a deadline of December 31st 2020 to negotiate its future trade deal with the EU. However, historically speaking, such trade deals take six or seven years to negotiate.

This opens the possibility of the UK having to repeatedly ask for more time, like we’ve seen with Brexit, or the UK ending the trade negotiations with “No Deal” at the end of next year.

In turn, this uncertainty might again affect British businesses’ outlook, even though Brexit itself looks set to be finalised this week.

After all, although we’ll know for sure that we’re leaving the EU this week, we don’t yet know what terms of trade we’ll have with the EU in future, what tariffs or bureaucracy there’ll be, and for what sectors of the economy. All this may affect the UK outlook.

On the other hand, it’s thought that the UK’s future trade talks might go more smoothly, now that PM Johnson has secured a large majority of MPs.

This should give the PM the wiggle room to negotiate with the EU, without having to barter simultaneously to the ERG or other groups of MPs, within his own party. So the possibility of smooth trade talks could impact sterling in 2020 too.

For example, Ulrich Leuchtmann at Commerzbank says that PM Johnson "might find it easier to extend the transition period, during which a sensible trade agreement would be difficult to obtain; he might be more inclined to give in on details of the trade agreement.”

This is compared to if the UK election result hadn’t been decisive, or if the Conservatives had only won a small majority, and may impact sterling next year.

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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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