The sterling vs euro interbank exchange rate has hit 1.17 in the last day. This is its highest since May 6th, or over six months.
By comparison, back on August 10th, the pound was as low as 1.0646 versus the euro on the interbank market. So it’s since risen by 9.9%, or over 10 cents.
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One reason why sterling has hit this new six-month high versus the common currency is because the markets are hopeful that there’ll be a stable UK government, after next month’s election.
Another factor why the pound to euro interbank exchange rate has gained in value is because, although Germany avoided recession over the Summer, its economy could shrink again in 2020.
However, looking to the next four weeks, sterling’s value versus the euro could be affected, because there’s no guarantee who’ll win the UK’s election next month, or if it will bring stability.
In addition, the sterling vs euro interbank exchange rate could be influenced, because UK retail sales unexpectedly fell in October, contributing to other signs of economic weakness this week.
Pound Euro Exchange Rate Rises, as Markets Hopeful of Majority UK Government
As I mention, one reason why the sterling vs euro interbank exchange rate has hit this new six-month high is because the world’s financial investors are increasingly hopeful that there’ll be a stable UK government, after December 12th’s general election.
It’s thought that a stable government would provide economic and political clarity to the UK, so contributing to economic growth.
In particular, global money managers think that there may be a stable UK government next month, because according to the latest opinion polls, the Conservatives retain a lead.
For example, according to respected pollsters YouGov’s most recent survey, the Tories stand at 42%, 14% points ahead of Labour’s 28%. Traditionally, this would grant the winning party a majority of MPs.
Although there are lots of polls that give different results about the UK political parties’ standing, the financial markets pay special attention to YouGov’s surveys.
This is because YouGov was the only polling company to accurately predict 2017’s general election result, in which the Tories fell from a 17% lead, to just 2%, causing former Prime Minister Theresa May to lose her majority.
As a result of these polls, the world’s investors are now factoring in a higher probability that the Conservatives will form a stable, majority government, after next month’s vote.
According to the markets, there’s now a 63% chance that Prime Minister Boris Johnson’s party will win a majority of MPs in the House of Commons, to pass laws in Parliament, up from 40% this time last week.
The world’s money managers increasingly think that the Tories may win a majority, because this Monday the Brexit Party’s leader, Nigel Farage, said that he won’t field candidates in the 317 seats that the Conservatives won in 2017.
As a result, there’ll be fewer political parties competing in these constituencies next month, which may enable a single party to win a clear majority.
The financial markets want the UK to have a stable government, because until recently, there’s been a ‘hung’ Parliament, in which the government hasn’t had a majority of MPs.
In turn, very few laws have been passed, about the UK’s domestic agenda such as schools, transport or hospitals, while Brexit is in limbo. Investors hope that this deadlock will soon end, thereby lifting the pound.
Sterling Vs Euro Gains, as Germany Avoids Recession, But May Shrink in 2020
What’s more, another factor why the pound to euro interbank exchange rate has reached this new six-month high is because, yesterday, we learnt that Germany unexpectedly avoided recession over the Summer, yet Deutschland’s economy could shrink further next year.
In turn, this could decelerate the wider Eurozone’s economic growth in 2020, including in France, Italy and Spain.
To be specific, Germany’s GDP (Gross Domestic Product) expanded by 0.1% in Q3, between July and September, said the Federal Statistics Office on Thursday, reports CNBC.
This was ahead of economists’ forecasts for minus 0.1% growth, as well as Q2’s 0.2% contraction. As a result, Germany avoided entering a technical recession, defined as two consecutive quarters of negative GDP growth.
Germany’s economy was buoyed over the Summer, by higher government and consumer spending. This is in spite of the US/China trade war, which has weighed down Germany’s vast manufacturing sector in recent months.
However, even with this surprise, Germany’s economy grew just 0.5% year-on-year, half the UK’s 1.0% expansion over the same three-month stretch.
Moreover, looking to 2020, many economists think that Germany’s GDP could contract again. In this case, a recession may have been delayed, not escaped.
For example, Andrew Kenningham, chief Europe economist at Capital Economics, says that "The economy will probably contract slightly next year – so a recession may have been postponed, rather than avoided altogether."
Mr. Kenningham adds that “Prospects for the coming quarters remain poor. Business surveys for October, such as the Composite PMI and Ifo Business Climate Index, suggest that the economy may well contract in Q4.”
“And with policymakers unlikely to loosen fiscal policy significantly, we think a mild recession is more likely than not in the coming year,” says Mr. Kenningham. This has weakened the euro.
GBP to EUR Rate Could Be Affected, as UK Election Result Remains Uncertain
However, looking over the next four weeks, the sterling vs euro interbank exchange rate could be affected, because even though many opinion polls point to a Conservative victory at next month’s UK general election, this isn’t guaranteed.
In particular, it’s thought especially difficult to predict this December 12th’s vote, as British voters are far likelier to switch political parties.
For example, according to an ICM poll recently, over 10% of people who voted for the Conservatives and Labour in 2017 may now favour the Liberal Democrats and Brexit Party.
What’s more, this week the main political parties have been unveiling their campaign proposals, which sketch out very different visions for the UK in future. These proposals could also affect people’s votes, reports The Telegraph.
The financial markets think that next month’s election is hard to predict, especially because there are a large number of so-called “swing seats”.
These are constituencies in which the current MP won by only a small margin in 2017. In these circumstances, only a relatively small number of people would have to switch votes, for another party to win, affecting the make-up of Parliament.
This is particularly the case, because the UK uses what’s called a First Past The Post (FPTP) electoral system. Here, the political party with the most votes wins, even if it’s a minority of the total votes cast.
For example, if one party wins 40% of the vote, and this is a larger percentage than any other party, then they’ll become the MP, even though 60% of people voted for other parties.
With this in mind, the world’s money managers are aware that, even though many opinion polls point to a Conservative majority, there’s no guarantee of this.
Alternatively, there might be hung Parliament again, in which no single party wins a majority of MPs. As we’ve seen over the last few months, in which PM Johnson has had a ‘hung’ Parliament, this can frequently cause deadlock.
For example, Adam Cole, strategist with RBC Capital Markets, says that "It would take a strong showing in only a small number of seats to remove the majority that most seem to expect.”
Mr. Coles adds that “UK voters have also shown unprecedented volatility and propensity to switch in recent years and what the polls say today may change materially in the next four weeks.” This could affect sterling.
Sterling Versus Euro Rate Could Be Influenced, as UK Retail Sales Fall in October
Moreover, looking forward, the pound to euro interbank exchange rate could also be affected, because UK retail sales surprisingly fell in October, said official statistics yesterday.
This may weaken the UK’s GDP growth in the final quarter of 2019, and follows a week in which UK economic growth, employment and inflation statistics all arrived below financial markets’ predictions.
According to the Office for National Statistics (ONS) this week, UK retail sales fell by 0.1% last month. This was below economists’ predictions for a 0.2% gain, as well as September’s stagnant 0.0% figure, according to the BBC.
The ONS said that sales fell across all categories. This may affect the value of sterling, because retail sales contribute significantly to the UK’s growth, as a large domestic factor.
It's thought that UK retail sales fell in October, in part because UK wage growth has slowed recently, said official statistics this week. In particular, UK pay packets expanded by 3.6% in the three months to September, 0.2% below August’s figures.
So "With fewer people in employment and wage growth slowing, consumers may feel less flush,” says Thomas Pugh at Capital Economics.
Mr. Pugh adds that "Overall, it is increasingly clear that the risks to our forecast for GDP growth of 0.2% q/q in Q4 appear on the downside."
This is to say that, as a result of these downbeat retail sales, UK economic growth may slow further from October to December. Already this week, we’ve learnt that the UK grew by 0.3% in Q3, 0.1% below forecasts. So this may impact sterling.
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