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Sterling Vs Euro Hits 11-Week High, as Boris Wants A Deal

Market CommentarySterling Vs Euro Hits 11-Week High, as Boris Wants A Deal
Sterling Vs Euro Hits 11-Week High, as Boris Wants A Deal
Pound Euro Exchange.

The pound to euro interbank exchange rate has hit 1.1221 in the last day. This its highest in over 11 weeks, or since June 21st 2019.

By comparison, back on August 10th, sterling vs euro was as weak as 1.0646. So in the month since then, the pound has since gained by +5.4%.

This may be of interest to you, if you’re buying currency for tuition fees to study at a German or French university, or you’re emigrating to Spain or Italy to retire and enjoy your golden years.

This is because, when you transfer money from the UK to the Eurozone, you might now get a higher euro total. This is compared to if you’d bought euros in the past 11 weeks.

In turn, this could make it more affordable for you to study at the University of Paris or Humboldt University of Berlin, or cut your costs to buy Marbella or Sardinia real estate to emigrate.

To keep up-to-date with the pound to euro interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, scroll to the Latest Market Rates Widget to see this week’s interbank rates.

Also, to check what’s influencing the value of sterling against the Eurozone’s common currency, visit Pure FX’s GBP to EUR Exchange Rate Updates page. Here, click on the newest article.

A first reason why the sterling vs euro interbank exchange rate has reached this 11-week high is because Prime Minister Boris Johnson said in Dublin yesterday that he wants a Brexit deal.

A second factor why the pound has strengthened against the euro is because the European Central Bank looks set to cut interest rates and extend its monetary stimulus, this Thursday.

However, the pound’s value versus the euro could be affected in the foreseeable future, because Boris Johnson’s government has said that it is adamant not to request an extension to Article 50.

Please find below a more detailed look at these reasons why the pound to euro interbank exchange rate has risen. You might find this helpful information, for when you transfer money abroad.

Pound Euro Exchange Rate Rises, as Boris Says He Wants A Brexit Deal

As I’ve mentioned, a first reason why the sterling vs euro interbank exchange rate has reached this 11-week high is because, yesterday, UK Prime Minister (PM) Boris Johnson said in Dublin that he wants a Brexit deal.

This has strengthened sterling, because Mr. Johnson’s comments suggest that he may still negotiate with the European Union (EU) to reach a Brexit agreement.

Mr. Johnson was visiting Dublin on Monday, for his first meeting with Ireland’s Prime Minister Leo Varadkar, since Mr. Johnson entered Number 10 Downing Street around two months ago.

Mr. Johnson’s priorities were to establish a personal relationship with Mr. Varadkar, as the UK and Ireland are close friends and allies, and to discuss the state of the ongoing Brexit negotiations.

Following their meeting, the two leaders agreed in a joint statement that the UK and Ireland remain committed to securing a Brexit agreement with the EU, according to the BBC.

In particular, Mr. Johnson’s and Mr. Varadkar’s statement said that: "While they agreed that the discussions are at an early stage, common ground was established in some areas although significant gaps remain."

In addition, in the joint press conference after their meeting, the UK’s PM said that he “wants to get a deal”. Mr. Johnson added that it “would be a failure of statecraft” if there were a ‘No Deal’ Brexit.

Given that, until recently, it was thought that Mr. Johnson’s government was preparing and even aiming for a ‘No Deal’ Brexit, the PM’s remarks were greeted with cautious optimism.

Moreover, it’s worth noting that Mr. Johnson is now legally obliged to ask the EU for an extension to Article 50, the UK’s Brexit negotiating deadline.

This is because, yesterday, the Queen gave her Royal Assent to opposition MPs’ bill, obliging the PM to avoid a ‘No Deal’ Brexit. So what with this law, and Mr. Johnson’s comments in Dublin yesterday, a Brexit agreement now looks likelier, thereby lifting sterling.

Sterling Vs Euro Gains, as ECB Set to Cut Interest Rates, Extend QE

Furthermore, another explanation why the pound to euro interbank exchange rate has reached this 11-week high is because it’s widely anticipated that the European Central Bank (ECB) will cut interest rates and extend its monetary stimulus, known as Quantitative Easing (QE), when it meets this Thursday.

This may support the Eurozone’s economy, yet simultaneously devalues the euro, reports FX Street.

The ECB is being heavily tipped to cut interest rates and extend QE this Thursday, first because Eurozone inflation remains well below the central bank’s target of close-to-but-below 2.0%, and has been for several years.

For example, Eurozone core inflation currently stands at just 1.0%, and hasn’t exceeded 1.4% since the continent’s debt crisis, pointing to subdued economic activity.

Also, it’s thought that the Eurozone’s central bank will reduce borrowing costs this week, because the bloc’s largest member, Germany, looks increasingly near recession.

Germany’s GDP (Gross Domestic Product) fell by -0.1% in Q2, between April and June, and this trend looks to have continued into Q3. This is because the USA’s and China’s trade war is slowing Germany’s industrial output.

For example, Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, said recently that: "It’s still early days for Q3 GDP projections, but soft July data in both retail sales and industrial production strongly hint that the German economy is now in a technical recession."

So the ECB could intervene, to shield Germany’s economy from the effects of the trade war.

In particular, the financial markets estimate that the ECB will cut its deposit rate, which it charges commercial banks to park money at the ECB overnight, further below -0.4%.

This stimulates the Eurozone’s economy, because if commercial banks suffer greater losses to park money at the ECB, they’re more likely to lend this money to businesses and households instead, to earn profits.

Also, the ECB could extend its QE program. This involves injecting vast sums of euros into the financial system, to lower Eurozone government’s borrowing costs, to encourage them to invest and stimulate economic growth.

The ECB ended its QE program as recently as December 2018, having pumped trillions into the currency bloc, but now looks set to restart its extraordinary stimulus.

Also, the Eurozone’s central bank looks set to cut interest rates and extend QE this Thursday, in particular because this is ECB President Mario Draghi’s last meeting.

So Mr. Draghi may wish to go out with a bang, to ensure the Eurozone’s future monetary stability and lift economic growth. This is before handing over to new chief, former IMF (International Monetary Fund) head Christine Lagarde.

However, although cutting interest rates and extending QE might improve the Eurozone’s economic health, this tends to weaken the euro.

This is because, first, lower interest rates make buying EUR-denominated financial assets less profitable for investors, cutting demand for the euro. Second, QE involves printing gigantic quantities of euros, thereby devaluing the common currency.

Pound’s Value Might Be Affected, as Boris Seeks to Avoid Extending Article 50

However, looking to the foreseeable future, the pound’s value versus the euro might be affected, because it’s been reported that UK PM Boris Johnson’s government is seeking ways to avoid complying with MPs’ new law, to extend Article 50.

This could influence sterling on the interbank market, because the UK government’s actions may further complicate the Brexit outlook.

To begin with, a UK government spokesman recently told respected financial news source Reuters that Number 10 Downing Street remains adamant not to extend the Brexit deadline. “The Prime Minister will not sanction any more pointless delays to Brexit,” said the source.

Meanwhile, a Downing Street official has told The Telegraph newspaper: "we intend to sabotage any extension.”

In addition, UK Chancellor of The Exchequer Sajid Javid told the BBC's Andrew Marr Show last Sunday that the government "will not be asking for an extension", reports The New York Times.

Moreover, the UK’s Foreign Secretary, Dominic Raab, has been reported saying that the law obliging an Article 50 extension is “lousy”. So it’s clear that the government wants to avoid extending Brexit beyond October 31st.

However, as I’ve mentioned, opposition MPs’ bill requiring Mr. Johnson to request a further Brexit extension from the EU has received the Queen’s Royal Assent, so Mr. Johnson must obey.

As a result, it’s unclear what legal steps the government can take to avoid carrying out MPs’ wishes, or if they intend to break the law, in which case the discussion might go to the courts.

Yesterday, Parliament was prorogued until October 14th, ostensibly to allow Mr. Johnson’s government to prepare its legislative agenda.

Given this, MPs will be in a poor position to prevent the PM bending or breaking the law, if he decides not to request another extension to Article 50. This suggests that the Brexit uncertainty could continue, which may influence the value of sterling.

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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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