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Sterling Vs Euro Hits 29-Week High, as Markets Confident of Tory Win

Market CommentarySterling Vs Euro Hits 29-Week High, as Markets Confident of Tory Win
Sterling Vs Euro Hits 29-Week High, as Markets Confident of Tory Win

The sterling vs euro interbank exchange rate has hit 1.1721 in the last day. This is its highest in over 29 weeks, or since May 6th 2019.

By comparison, back on August 10th, the pound was as weak as 1.0646 against the Eurozone’s common currency. So it’s since strengthened by 10.09%, or by over 10.5 cents.

This may benefit you, when you transfer money to Spain or France from the UK, because when you buy euros, you could get a higher total, compared to if you’d done so in the last 29 weeks.

In turn, this could make it more affordable for you, if you’re buying property abroad on the Costa del Sol or in the Dordogne, or if you’re an expatriate making regular payments 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’, for 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, click on the most recent article.

One reason why sterling has reached this 29-week high versus the common currency is because the financial markets are increasingly confident of a Tory victory, at December 12th’s UK election.

Another factor why the pound to euro interbank exchange rate has strengthened is because the UK’s retail sales fell less than forecast in November, said trusted new statistics yesterday.

However, looking to the next two-and-a-half weeks before the UK vote, the sterling vs euro interbank exchange rate may be influenced, because the result of the election is not guaranteed.

Pound Euro Exchange Gains, as Markets Confident of Tory Win

As I mention, one reason why the sterling vs euro interbank exchange rate has hit this 29-week high of 1.1721 in the last day is because the financial markets are increasingly confident that, at the UK’s general election on December 12th, the Conservative Party will win a majority of MPs.

According to investors, there’s 70% chance of this outcome, up from 45% around a fortnight ago.

The world’s money managers increasingly think that the Tories will win a majority in Parliament next month, because a number of opinion polls forecast this.

For example, according to The Telegraph newspaper’s “poll of polls” this weekend, the Conservatives are on course for a majority of 64 MPs. Meanwhile, the BBC’s data also suggests that the Tories will win a majority of MPs.

In general, the financial markets want the UK general election to deliver a clear, decisive result, in which one political party wins. This is because, this way, that political party can form a stable government, with a majority of MPs in Parliament to pass laws.

This will enable the government to get on with the UK’s domestic priorities, like hospitals and schools, as well as at long last finalise Brexit.

For example, it’s hoped that the next government will conclude Brexit, to get on with negotiating the future trade deal with the EU.

This will provide some certainty to UK businesses and investors, who in turn might feel more inclined to hire new employees, or buy new equipment. In turn, this may accelerate the UK’s GDP (Gross Domestic Product) growth into 2020 and beyond.

Joshua Mahony, an analyst with IG in London, says that "markets gain confidence that we could see a Conservative majority in the critical Brexit-focused election. The polls pointing towards continued improvements in Tory support.”

Meanwhile, Adam Cole, a strategist with RBC Capital Markets, says that "It is hard to disagree that a Conservative majority is the most likely outcome.”

Moreover, the financial markets generally want a single political party to win the UK general election, to avoid what’s called a ‘hung’ Parliament. This is when a government is formed, but without a majority of MPs in the House of Commons.

As a result, the government must rely on other parties’ votes, or the opposition can join forces, and take control of Parliament’s legislative agenda.

There’s been a ‘hung’ Parliament in recent months, even since Prime Minister Boris Johnson expelled several of his Tory MPs, for voting against his Brexit plans. In this time, there’s been legislative deadlock, with few UK domestic laws passed, and Brexit in limbo.

Investors wish to avoid this in future, so signs that there’ll be a clear winner in next month’s vote have lifted sterling.

Sterling Vs Euro Rises, as UK Retail Sales Beat Forecasts in November

Moreover, another factor why the pound to euro interbank exchange rate has hit this 29-week high in the last day is because UK retail sales exceeded forecasts this month, says new trusted data.

According to the CBI (Confederation of British Industry) distributive sales survey for November, the result rose to minus 3%, above predictions for minus 10%, and October’s minus 10%, reports City AM.

This has strengthened the value of sterling versus the Eurozone’s common currency, because it suggests that British consumers are increasingly happy to spend. This is leading up to the crucial Black Friday and Christmas period.

According to the CBI, this result of minus 3% was the strongest figure in seven months, and follows six months of falls, boding well for British high street retailers and online outlets.

When the CBI reports a figure of minus 3%, this means that a balance of minus 3% of retailers saw sales fall in November, compared to those where sales rose. UK retail sales exceeded forecasts this month, because of strong grocery sales.

Moreover, turning to December, a balance of 21% of retailers expect sales to increase. 44% forecast a rise, versus 23% who expect a fall.

CBI deputy chief economist Anna Leach said about this data that “Retailers are entering the festive season with a bit of hope that sales will head up, with the strongest expectations in half a year.”

“Actual sales have also stabilised and have nudged above average for the time of year. And employment has stopped falling after three years of decline,” added Mrs. Leach. So this has contributed to lift the pound.

Upbeat CBI retail sales figures tend to strengthen sterling, because retail sales make up a significant part of the UK’s GDP. When British shoppers spend more, this suggests that they’re happy with their financial situation, to splash out more at the shops.

In turn, this encourages retailers to invest, and factories to produce more goods, creating a virtuous cycle of higher economic growth, often benefiting the pound.

GBP to EUR Rate May Be Affected, as UK Election Result Up-In-The-Air

However, turning to the next two-and-a-half weeks until the UK’s general election on December 12th, the sterling vs euro interbank exchange rate may be influenced.

This is because, although the financial markets are increasingly confident that there’ll be a Conservative victory, this is by no means guaranteed. In fact, some new opinion polls suggest that the Tories’ lead is declining.

For example, according to ICM’s latest poll for Reuters yesterday, the Conservatives’ lead has fallen by 3%, to 7%. Here, the Tories have fallen by 2%, to 41%, while the opposition Labour Party has risen by 1%, to 34%.

Meanwhile, according to a new YouGov survey, Labour’s support in Wales has risen by 9% since early November. So according to these polls, opinions may be shifting.

Importantly, ICM’s poll for Reuters takes the Tories’ lead below 10%. Traditionally, it’s thought that a 10% lead in the polls is needed, to guarantee that the first-place political party wins a majority of MPs in Parliament.

So ICM’s poll increases the possibility that there may be a ‘hung’ Parliament, in which no single party wins. This may extend the UK’s domestic legislative and Brexit deadlock.

Furthermore, according to YouGov data, 17% of people who voted for Labour in 2017 remain undecided, while just 11% of 2017 Tory voters are yet to make up their in mind.

It’s thought that this increases Labour’s potential to rise in the polls, if people who voted for Labour two years ago do so this time round. By comparison, the Tories’ potential to rise from “undecideds” looks smaller.

Samuel Tombs, UK Economist at Pantheon Macroeconomics, says that "Right now, with a 13% lead, a Conservative majority is likely. But if the lead goes <10%, it would only take a typical polling error in Labour's favour for a hung parliament."

With this in mind, it would only take a 3% swing in the polls for the odds that a single party will win next month’s election to fall notably.

Tomorrow evening, YouGov will release its so-called ‘MRP voting model’. This maps people’s voting intentions into who many seats each party may win in Parliament.

Importantly, this model predicted that former PM Theresa May would lose her Parliamentary majority in 2017. So the financial markets may pay close to attention to this release, which in turn could affect 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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