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Sterling Vs Euro Gains, as UK Services Rebound in December

Market CommentarySterling Vs Euro Gains, as UK Services Rebound in December
Sterling Vs Euro Gains, as UK Services Rebound in December
Pound Euro Exchange.

The sterling vs euro interbank exchange rate stands at 1.1811 today at the time of writing.

By comparison, yesterday the pound was as low as 1.1705 versus the Eurozone’s common currency on the interbank market. So it’s since strengthened by over one cent, or by 0.9%.

This could benefit you, if you’re a Briton buying property abroad on Spain’s Costa del Sol or France’s Cote d’Azur, or if you need currency for tuition fees for your son or daughter to study at a Eurozone university.

This is because, when you transfer money abroad from the UK, you might get a higher euro total in your Eurozone bank account, compared to if you’d bought euros yesterday.

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 versus the common currency, go to our GBP to EUR Exchange Rate Updates page. Here, simply click on the latest article.

One reason why the pound to euro interbank exchange rate has risen in the last day is because the UK’s services sector activity for December has been upgraded, said trusted statistics on Monday.

However, looking to this week, sterling’s value versus the common currency could be affected, because the financial markets remain nervous about the UK’s and EU’s upcoming future trade deal negotiations.

In addition, the sterling vs euro interbank exchange rate might be influenced, because it’s thought that the UK economy may have stagnated in the last three months of 2019, in spite of the services sector’s upturn in December.

Pound Euro Exchange Rate Gains, as UK Services Revive in December

As I mention, one reason why the sterling vs euro interbank exchange rate has strengthened up to 1.1811 today is because the UK services sector’s performance unexpectedly improved in December.

This has raised hopes that the UK’s GDP (Gross Domestic Product) might not fall in Q4 2019, between October and December, while boding well for UK economic growth in 2020.

According to economics watchdog IHS Markit on Monday, the UK’s services PMI (Purchasing Managers’ Index) rose to 50.0 last month.

This compares to IHS Markit’s “flash” estimate of 49.0 a fortnight before, so tells us that UK services businesses outperformed compared to earlier data.

In particular, this 50.0 is exactly the figure that separates economic growth from contraction, so points to stagnating activity, rather than a fall.

To be specific, UK businesses’ expectations rose by 0.4 from the earlier estimate, up to 66.3, the highest since September 2018.

Also, new orders increased at the fastest pace since July, while employment among British services firms expanded more quickly than in five months.

It’s thought that UK services activity was better than previously reported in December, in part because of the decisive result of Great Britain’s general election, on Thursday 12th December.

Here, the Conservative Party won a surprisingly large majority of 80 MPs. This could contribute to the UK’s political and economic stability in 2020, by providing a stable, majority government.

This is compared to if there’d been, for example, a ‘hung’ Parliament, in which no single political party wins a majority of MPs.

As a result, some UK services firms reported that they expect business activity to increase, once Brexit is at last finalised, at the end of this month.

After all, this will put an end to over three-and-a-half years of negotiations, in which there’s been three Prime Ministers, two general elections, and ongoing negotiations with the EU.

So once the UK exits the EU, this may encourage some British businesses to hire more staff or increase investment, in early 2020.

For example, Thomas Pugh, economist at the consultancy Capital Economics says that “The decisive result of the general election appears to have given the services PMI a bit of a boost."

Meanwhile, Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS), says that “Commentators could be forgiven for believing there could potentially be a turning point on the horizon if the UK plays its cards right."

So this surprisingly positive UK services PMI for December has helped lift the sterling vs euro interbank exchange rate.

GBP to EUR Rate May Be Affected, as UK GDP Forecast to Stagnate in Q4

However, looking ahead, the sterling vs euro interbank exchange rate could be affected, because it’s forecast that the UK economy at best stagnated in Q4 2019, between October and December, even with the services sector’s upturn last month.

In part, this is because both the UK’s manufacturing and construction sectors continued to shrink in December, while all three sectors of the UK economy contracted in November, while stagnating in October.

In particular, according to IHS Markit’s UK composite PMI for December, which takes into account services, manufacturing and construction, activity reached 48.9 last month.

This is below the 50.0 figure that signals economic growth, so points to falling output in the UK at the tail end of 2019.

In addition, the composite PMI reached just 49.3 in November, and was at 50.0 in October. So this suggests that the UK’s GDP growth in Q4 2019 will be modest, or a contraction.

Howard Archer, chief economic adviser at the consultancy EY Item club, says that “Even allowing for the fact that the purchasing managers’ surveys can tend to present an overly gloomy picture at times of heightened uncertainties, the December surveys fuel suspicion that the UK economy likely stagnated in the fourth quarter."

The UK’s Office for National Statistics (ONS) will release the economy’s growth figures for Q4 2019 in the coming weeks, which might affect the GBP to EUR interbank exchange rate.

Sterling Vs Euro Could Be Impacted, by Upcoming UK/EU Trade Talks

Moreover, another factor that might affect the sterling vs euro interbank exchange rate in the foreseeable future is the upcoming UK/EU trade negotiations.

In particular, the financial markets are concerned that the trade talks might be drawn out, like the Brexit negotiations, and by Prime Minister (PM) Boris Johnson’s decision to limit the talks to December 31st 2020, when such agreements normally take six or seven years to complete.

PM Johnson has legislated to limit the trade talks to the end of this year, seemingly to show his commitment to “get Brexit done”, and to put pressure on the EU to agree a favourable trade deal faster.

However, for the financial markets, the risk is that, if the UK and the EU don’t agree a trade deal by the end of this year, the two might default to trading on World Trade Organisation (WTO) terms.

This might involve more tariffs and bureaucracy, in which case it could be costlier and more complex for UK and EU firms to import and export with each other.

The UK is set to formally exit the EU at the end of this month. Meanwhile, the EU’s 27 member states will decide the mandate for the trade talks, to deliver to the EU’s Chief Brexit Negotiator, Michel Barnier, by February 15th.

With this in mind, it looks like the UK/EU trade negotiations will officially begin in March. However, before then, PM Johnson will host new European Commission (EC) President Ursula von der Leyer, in Downing Street this Wednesday.

According to The Times newspaper, PM Johnson and President von der Leyer will meet "for opening talks on Britain’s post-Brexit trade deal with the EU.”

Meanwhile, according to an EC spokesperson yesterday, the two leaders’ discussion will “set the scene” for the UK’s and the EU’s trade negotiations this year.

Following the protracted Brexit negotiations, it’s thought that both PM Johnson and President von de Leyer wish the future trade talks to go smoother. So we’ll see how their conversation goes this Wednesday, and its effect on the value of sterling.

Mikael Olai Milhøj at Danske Bank, says that "We had thought it would take a while before Brexit would dominate the headlines again but PM Johnson’s renewed promise not to extend the transition period, which is set to end on 31 December 2020, means investors have become slightly more concerned about Brexit."

Meanwhile, Jane Foley, at Rabobank adds that "UK/EU trade talks will only start after the UK has left the EU on January 31, the pace and tone of these talk will set the tone for the Pound into the spring.”

“In contrast to PM Johnson’s confidence that a trade deal between the UK and the EU can be completed by the end of this year, recent comments from EU Commission President suggest an extension may be needed."

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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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