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Sterling Vs Euro at New 31-Month High, on Odds of Tory Win

Market CommentarySterling Vs Euro at New 31-Month High, on Odds of Tory Win
Sterling Vs Euro at New 31-Month High, on Odds of Tory Win
Sterling Vs Euro.

The sterling vs euro interbank exchange rate stands at 1.1790 today at the time of writing, its new highest in 31 months, or since May 14th 2017.

By comparison, back on August 10th 2019, the pound to euro interbank exchange rate was as low as 1.0646. So it’s since strengthened by 10.74%, or by over 11 cents.

This may benefit you, when you transfer money to Spain or France from the UK, because when you exchange currencies, you may get a higher euro total than over the last 31 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 Cote d’Azur, or if you’re making regular payments there for your mortgage.

To stay updated 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, simply click on the latest article.

One reason why the pound has hit this new 31-month high versus the euro is because the financial markets continue to factor in a high chance that the Tories will win next week’s UK election.

However, looking to the next eight days until the UK’s vote, sterling’s value may be affected, because there remains the possibility of a ‘hung’ Parliament, in which no single political party wins.

In addition, the sterling vs euro interbank exchange rate could be affected this week, by UK and Eurozone economic data, including UK services sector activity and Eurozone economic growth.

Pound Euro Exchange at New 31-Month High, on Odds of Tory Election Win

As I mention, one reason why the sterling vs euro interbank exchange rate has reached this new 31-month high today is because the financial markets continue to factor in a high probability that the Conservative Party will win next Thursday’s UK general election.

It’s thought that, if a single political party wins next week’s vote, this will contribute to the UK’s economic and political stability.

To be specific, according to the world’s money managers, there’s a 66% chance that the Tories will win a majority of MPs in the House of Commons next week.

This is because, looking at most opinion polls recently, Prime Minister Boris Johnson’s has a lead of 7%-11% over the opposition Labour Party, reports the BBC. Traditionally, this would be enough to grant the winning party a majority of MPs.

Global investors have particularly factored in a higher probability that the Conservatives will win next Thursday’s election, following the release of polling company YouGov’s “MRP” last week.

According to the MRP, which maps out how many seats each party could win based on their nationwide polling support, the Tories stand to win a majority of 68 MPs in the House of Commons.

The financial markets pay special attention to YouGov’s MRP, because it’s the only survey that, in 2017, accurately predicted that former PM Theresa May would lose her majority of MPs.

At the time, the other polls suggested that Mrs. May would win comfortably. So since then, the world’s money managers watch YouGov’s MRP carefully, for clues as to what next week’s result may be.

In general, the financial markets want the UK’s general election to deliver a decisive result, in which a single political party wins a majority of MPs, to form a stable government.

This is because, this way, the new government can quickly finalise Brexit, get on with negotiating the UK’s future trade deal with the EU, and work on the UK’s domestic priorities, including hospitals and schools.

In turn, it’s thought that if Brexit is resolved and the government starts to invest again in public infrastructure, this may give confidence to British business and investors.

As a result, UK companies may start to hire more employees and invest in new equipment and technology, which might accelerate the UK’s GDP (Gross Domestic Product) growth, thus supporting sterling.

For example, Chris Towner, director at JCRA, says that "a clear majority for the Conservatives would help strengthen Sterling further and may loosen the economic restraints caused by the Brexit uncertainty.”

Mr. Towner adds that “With a promised fiscal stimulus of £20bn alongside business-friendly policies, sterling would be expected to” strengthen in value.

GBP to EUR Rate Might Be Affected, by Risk of ‘Hung’ Parliament at Election

However, turning to the eight days remaining until the UK’s general election next Thursday, the sterling vs euro interbank exchange rate could be influenced, because there remains a risk of a ‘hung’ Parliament.

This is when no single political party wins enough seats in the House of Commons to form a stable government, thereby causing economic and political deadlock for the UK.

To explain, there remains a risk of a ‘hung’ Parliament, because according to financial markets, the Conservatives have only a 66% chance of winning a majority of MPs this week.

To turn this probability upside-down, there’s a 34% possibility that no single political party wins next Thursday’s election. In this case, the UK’s politicians may struggle to form a stable, reliable government.

We’ve seen the results of a ‘hung’ Parliament, since 2017’s general election. Back then, former PM May lost her majority of MPs in Parliament, and had to negotiate a coalition with Northern Ireland’s Democratic Unionist Party (DUP) to govern.

At the time, in return for voting with Mrs. May, the DUP received £1 billion for Northern Ireland. So in a ‘hung’ Parliament, small parties can have a big influence.

Moreover, since Mr. Johnson became PM a few months ago, he’s excluded several Conservatives MPs from his party, for voting against his Brexit plans.

In the months since, opposition MPs have frequently taken control of Parliament’s legislative agenda, to amend Mr. Johnson’s legislation or propose new laws. This has often resulted in a domestic legislative and Brexit limbo for the UK.

With this in mind, the financial markets are concerned that, if next Thursday’s election produces another ‘hung’ Parliament, this limbo may continue.

This is especially an issue, because the UK’s current Brexit deadline is at January 31st 2020. So if there’s another ‘hung’ Parliament, the UK may run up against this deadline, raising the risk of a ‘No Deal’ or asking Brussels for more time.

In the meantime, if a single political party is unable to form a stable government next week, this may further contribute to the uncertainty for UK businesses and investors.

In turn, firms might continue to delay their hiring and investment projects, which could further weaken the UK’s economic growth next year. As a result, this might also affect the value of sterling, looking to 2020.

Pound Versus Euro May Be Affected, By UK Services PMI, Eurozone Q3 GDP

Furthermore, turning to this week’s UK and Eurozone economic releases, these could also affect the sterling vs euro interbank exchange rate.

In particular, the updated UK services PMI (Purchasing Managers’ Index) has been released this morning, while tomorrow, we’ll learn the Eurozone’s revised estimate for GDP growth in Q3 2019, over the Summer, from July to September, according to FX Street.

To begin with the UK, this morning economics watchdog IHS Markit released its updated UK services PMI for November 2019.

This been revised up to 49.3 from last week’s “flash” estimate of 48.6, telling us that Britain’s services firms, such as restaurants, lawyers or architects, performed better last month than previously estimated. Therefore, this could support the value of sterling.

However, it’s useful to note that IHS Markit’s UK services PMI for November remains below the 50.0 figure that signals growth. In other words, although Britain’s services sector shrank less sharply than previously thought last month, it still contracted.

As a result, this may well detract from the UK’s economic growth figures for the last quarter of 2019, from October to December.

Meanwhile, tomorrow the Eurozone’s revised estimate for GDP growth in Q3 will be released, by Eurostat, at 10.00 GMT.

This is forecast to show that the common currency bloc’s economy expanded by 0.2% over the Summer, in line with the previous estimate. In particular, while the euro area continues to expand, the bloc is being dragged down, by the US/China trade conflict.

Given this, a result above or below 0.2% could affect the euro on the interbank market tomorrow, because it would surprise the financial markets.

Typically, stronger economic growth tends to lift the euro, while weaker GDP expansion often weighs down the Eurozone’s common currency. So this release could be worth watching for tomorrow at 10.00 GMT, for its effect on the euro.

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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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