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Pound Euro Exchange Rises, as Brexiteers May Support Deal

Market CommentaryPound Euro Exchange Rises, as Brexiteers May Support Deal
Pound Euro Exchange Rises, as Brexiteers May Support Deal
Pound Euro Exchange.

The pound to euro interbank exchange rate has hit 1.1292 in the past day, just -0.11% below its highest in over one week, or since Wednesday 25th September.

By comparison, back on Tuesday 1st October, British sterling was as weak as 1.1196 versus the Eurozone’s common currency. So it’s since strengthened by +0.85%.

This could benefit you, 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 week.

In turn, this could make it more affordable for you if you’re buying property abroad on the Costa del Sol or the Languedoc, or to make regular payments for your Spanish or French mortgage.

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, visit our GBP to EUR Exchange Rate Updates page. Here, click on the most recent article.

One reason why the pound euro exchange rate has neared this one-week high is because, in the UK’s Parliament, “hard” Brexiteers have signalled that they may support the latest proposals.

However, looking forward, sterling’s value versus the common currency could be affected, because the European Union (EU) has said that it’s “open but not convinced” by the UK’s plans.

In addition, looking to the foreseeable future, the pound to euro interbank exchange rate may also be influenced, because the UK’s dominant services sector fell into contraction in September.

Sterling Vs Euro Gains, as “Hard” Brexiteers May Support Boris’s Plans

As I mention, one reason why the pound to euro interbank exchange rate has neared this one-week high is because, yesterday, UK Prime Minister (PM) Boris Johnson gave a statement in Parliament, to explain the revised Brexit proposals that he’s submitted to the EU, to MPs.

In response, “hard” Brexiteers said that they may support the UK government’s plans for the first time.

For example, Steve Baker, a leading Brexiteer and head of the European Research Group (ERG) said in the House of Commons on Thursday 3rd October that "We now glimpse the possibility of a tolerable deal,” reports Politics Home.

Mr. Baker’s sentiments were echoed by other key Brexiteers such as Bill Cash and Marc Francois, who’d previously voted against ex-PM Theresa May’s draft deal three times.

In addition, other MPs who’ve so far opposed the government’s Brexit proposals also signalled their willingness to vote for Mr. Johnson’s revised plans yesterday too.

These include the PM’s Northern Ireland allies, the Democratic Unionist Party (DUP), who’ve said that they’re “content” with the plans. They also include 20 Labour MPs, who may rebel against Labour leader Jeremy Corbyn.

Crucially, the MPs who’ve signalled that they may vote for Mr. Johnson’s revised plans also include some of the 21 “independent” MPs, who used to be members of the Conservative Party, but whom the PM kicked out, or removed the whip, for rebelling against his Brexit strategy.

All in all, Mr. Johnson could now be close to winning a majority in Parliament to support his revised Brexit proposals.

This is a positive sign, because if the EU sees that Mr. Johnson commands a majority in the House of Commons for his Brexit plans, Brussels is more likely to seriously negotiate with the UK PM.

In turn, this raises the probability that the UK and the EU could agree a Brexit deal, by the important EU summit on October 17th. This would avoid the need to extend the Brexit deadline beyond October 31st.

To explain, Mr. Johnson’s revised Brexit proposals are known as the “two borders for four years plan”. They’re intended to replace the Northern Irish “backstop”, featured in the current draft Withdrawal Agreement.

The “backstop” was drafted, to ensure there’s no hard border on the island of Ireland, to protect peace, yet would simultaneously tie the UK to the EU’s Customs Union after Brexit.

The advantage of the PM’s “two borders for four years" plan is that Northern Ireland would continue to follow the EU’s customs rules after Brexit, thereby apparently avoiding the need for a hard border on Ireland.

At the same time, goods travelling from Northern Ireland to the rest of the UK would be checked, allowing the UK to simultaneously pursue its own trade deals. This has boosted sterling.

Pound Euro Exchange Could Be Affected, as EU Response to UK Plans Lukewarm

However, looking ahead, the pound to euro interbank exchange rate may be influenced, because although it’s possible that Mr. Johnson’s revised Brexit proposals have won support among a majority of MPs, the EU’s response to the UK’s amended plans has been lukewarm so far.

This suggests that there’s more negotiating to be done, to reach a deal before the current October 31st deadline.

For example, while Mr. Johnson described his revised Brexit proposals yesterday as a “genuine attempt to bridge the chasm”, European Council President Donald Tusk, one of the EU’s most senior figures, said that he’s “open but not convinced”, according to the BBC.

Meanwhile, European Commission President Jean-Claude Juncker informally responded that there’s “further work to be done” on a deal.

In addition, Ireland’s Taoiseach (Prime Minister) Leo Varadkar said that the UK’s plans were “welcome”, but "fall short in a number of aspects".

Mr. Varadkar’s response is important, because until Ireland’s government is satisfied that the Brexit plans will avoid a hard border on the island of Ireland, they’re unlikely to rubber stamp the deal. The EU has said that it supports Dublin.

Elsewhere, the EU’s Chief Brexit Negotiator Michel Barnier yesterday told European diplomats that he “still has plenty of questions” about the UK’s proposals to replace the backstop.

Also, the European Parliament's Brexit co-ordinator, Guy Verhofstadt, called the plans “unworkable” and “a repackaging of old ideas”. This was probably the toughest EU response to the UK’s proposals.

So overall, the EU’s response suggests that, while Brussels welcomes the UK’s attempt to seriously engage, to replace the problematic “backstop” and reach a deal, there’s work to be done.

A key question is whether the UK and the EU can now reach a Brexit deal in the next few weeks, or if they’ll be obliged to extend the UK’s Brexit deadline, beyond the current limit of October 31st.

The UK government says that it wants to reach a final agreement by Thursday 17th October, less than a fortnight from now, to avoid further extending Brexit.

To this end, the PM’s Europe adviser, David Frost, is due to hold another round of negotiations in Brussels shortly. Otherwise, the UK government could be obliged to request another extension to Article 50. This may affect the pound.

GBP to EUR Rate Might Be Influenced, as UK Services Sector Contracts

In addition, looking to the foreseeable future, the sterling vs euro interbank exchange rate could be affected, because the UK’s dominant services sector shrank in September, said trusted statistics yesterday.

This adds to reports earlier this week that the UK’s manufacturing and construction industries are in contraction too, and lifts the odds that the UK may soon enter recession.

According to economics watchdog IHS Markit’s monthly PMI (Purchasing Managers’ Index) on Thursday, UK services fell to 49.5 in September. This was below financial market forecasts for 50.3, as well as August’s 50.6, reports The Guardian.

Crucially, this is below the 50.0 figure that separates economic growth from contraction. UK services comprise about 80% of the country’s GDP (Gross Domestic Product).

The UK’s services industry shrank for a number of reasons last month, including lower sales, rising costs, Brexit uncertainty, as well as job losses.

IHS Markit reported that services companies, which includes restaurants, social care businesses and professional services like lawyers or accountants, cut jobs at the fastest pace since 2010 in September. This is as the outlook grows tougher.

Barry Naisbitt, of the respected National Institute of Economic and Social Research (NIESR), said about these downbeat figures that:

“It’s difficult to find any fantastically good news at the moment. We’re seeing uncertainties play out. An increase in tariffs, and uncertainty about tariffs, is certainly playing a role in muting world trade.”

In addition, Duncan Brock, group director of the Chartered Institute of Procurement & Supply (CIPS), said that:

“Deferred client orders and reduced consumer spending as a result of Brexit uncertainty and a slowing global economy meant hard-pressed businesses started to lose their battle against the hardest conditions for about a decade.”

In particular, it’s feared that the United States’ and China’s trade war, which has so far weakened the world’s manufacturing sector, may have now spread to the services industry.

Based on these figures, it’s thought that UK GDP may have shrunk by -0.1% in Q3, between July and September. This would follow Q2’s -0.2% contraction, meaning that the UK would enter a technical recession, its first since 2012. This could influence the pound.

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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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