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Sterling Vs Euro Hits 6-Week High, as ‘No Deal’ Less Likely

Market CommentarySterling Vs Euro Hits 6-Week High, as ‘No Deal’ Less Likely
Sterling Vs Euro Hits 6-Week High, as ‘No Deal’ Less Likely
Pound Euro Exchange.

The pound to euro interbank exchange rate stands at 1.1178 today at the time of writing. This is its strongest in over six weeks, or since July 25th.

By comparison, back on August 10th, sterling was as weak as 1.0646. So the GBP has since risen versus the EUR by +4.99%, or by over five cents.

This could be of interest to you, if you’re a Briton emigrating to the Mediterranean with your partner or family to retire, or you’re a UK business owner making international payments in euros.

This is because, when you transfer money to Spain, France or another Eurozone country, you could now get a higher euro total, compared to if you’d exchanged currencies in the last six weeks.

In turn, this would make it more affordable for you to purchase Spanish or French real estate, or cut your currency for your business costs to import Eurozone products to the UK.

To stay up-to-date with the sterling vs 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 the pound against the euro on the interbank market, visit Pure FX’s GBP to EUR Exchange Rate Updates page. Here, click on the latest article.

A first reason why the pound to euro interbank exchange rate has reached this six-week high is because, this week, MPs in Parliament have voted to prevent a ‘No Deal’ Brexit.

A second factor why the GBP has strengthened against the EUR is because Germany’s economy continues to show signs of weakness, and may fall into recession, said fresh data this week.

That said, looking forward, the sterling vs euro interbank exchange rate might be affected both by the UK’s growing economic downturn, and the European Central Bank’s meeting next week.

Please find below a further explanation of these reasons why the pound has hit this six-week high versus the euro. You might find this helpful, for when you transfer money abroad soon.

Pound Euro Exchange Rate Rises, as MPs Vote to Block ‘No Deal’ Brexit

As I’ve mentioned, a first reason why the sterling vs euro interbank exchange rate has reached this six-week high is because, this week, MPs in the House of Commons have voted to prevent a ‘No Deal’ Brexit.

This has lifted the value of the pound against the common currency, because it’s thought that this increases the probability that the UK will eventually exit the EU with a deal.

Earlier this week, opposition MPs and rebel Conservative MPs voted first to take control of Parliament’s agenda from Prime Minister (PM) Boris Johnson’s government, then to oblige Mr. Johnson to request an extension to Article 50 from the EU, reports the BBC.

Article 50 is the UK’s Brexit negotiating timetable, set out in the Treaty of Lisbon, and the current deadline is on Halloween, or October 31st.

It’s thought that opposition MPs, including Jeremy Corbyn’s Labour Party and Jo Swinson’s Liberal Democrats, wish to extend Article 50 by another three months, up to January 31st.

This would give Parliament time to either debate what sort of Brexit it wants, now that MPs have control of Parliament’s agenda, to call a second Brexit referendum, or arrange a general election.

The financial markets have welcomed opposition MPs’ victory over the Prime Minister this week, because it’s thought that, if the UK leaves the EU with an agreement, this will favour the UK’s future economic growth.

After all, the UK has been part of the European Economic Community (EEC) since the 1970s, our economies are tightly linked, and we export vast amounts to Europe. So this has contributed to strengthen sterling.

GBP to EUR Rate May Be Affected, as UK Political Outlook Still Up-in-The-Air

However, it’s useful to note that, just because the House of Commons successfully passed a bill blocking a ‘No Deal’ Brexit this week, the UK’s economic outlook is far from sky blue.

First, this is because, yesterday, Mr. Johnson said in a speech in Yorkshire that he’d “rather be dead in a ditch” than request a second Article 50 extension from the EU, to prolong the UK’s Brexit limbo, according to The Guardian newspaper.

So if MPs’ bill passes the House of Lords today, as forecast, and then receives the Queen’s Royal Assent to become law, it’s unclear what the PM will do.

If Mr. Johnson ignores the law, he’d presumably be committing some sort of crime. Alternatively, if Mr. Johnson sticks to his principles and refuses to request an Article 50 extension, he could have little choice but to resign.

Alternatively, even if Mr. Johnson reverses course and decides to request the Article 50 extension, his authority as PM has been weakened following this week’s votes.

This is because Mr. Johnson promised to expel any Conservative MPs who voted with the opposition to take control of Parliament’s agenda. In the event, 21 Tories rebelled on Tuesday, and Mr. Johnson has duly expelled them all.

The thing is though, before this week’s votes, Mr. Johnson had a majority of just one MP in the House of Commons.

Also, we learnt yesterday that the PM’s brother, Education Minister Jo Johnson, has resigned over disagreements with his older sibling over Brexit, reports Sky News. So Mr. Johnson now finds himself the leader of a minority administration, with a limited ability to pass legislation.

As a result, this Wednesday Mr. Johnson called for a general election, which under the UK’s Fixed Terms Parliament Act, requires 2/3rds of MPs to support. Labour refused to back Mr. Johnson’s motion, until the bill blocking a ‘No Deal’ Brexit becomes law.

The PM is due to table another motion calling for an election next Monday, so the UK’s political outlook may well remain unstable. Looking forward, this may affect the value of the pound.

Sterling Vs Euro Rises, as German Factory Orders, Industrial Production Fall

Moreover, another explanation why the pound to euro interbank exchange rate has reached this six-week high today is because Germany’s economy continues to weaken, according to official data released this week.

This has contributed to weigh down the euro, because Germany is the Eurozone’s largest economy, its engine room, so this bodes ill for the common currency bloc’s economic growth.

Germany’s Federal Statistics Office said this Thursday 5th September that Germany’s factory orders fell by -2.7% in July compared to the month before.

This was beneath financial market forecasts for a -1.5% fall, as well as June’s +2.7% increase. Moreover, year-on-year, Germany’s factory orders dropped by a larger -5.6% in July.

In particular, Germany’s factories received fewer orders in July, because of the USA’s and China’s trade war.

In recent months, the world’s two largest economies have been imposing tariffs worth hundreds of billions of dollars on each other, to vie for economic dominance. However, Washington and Beijing’s dispute is suppressing global trade flows, including for German factories.

For instance, Germany’s factory orders for customers outside the Eurozone fell by -6.7% in July month-on-month, said official data yesterday.

This compares to a smaller -0.5% fall in domestic orders, among German customers, as well as a +0.3% rise in orders from the rest of the Eurozone. So this suggests that the trade war is affecting demand among Germany’s international clients.

Carsten Brzeski, ING’s Chief Economist for Germany, said about these downbeat statistics that: “The development of industrial orders is a painful illustration of the downward trend of German industry over the last 1 ½ years.”

“What initially only looked like an order book deflation at high levels has become an industrial slump,” added Mr. Brzeski. So this points to the depth of Germany’s downturn.

In addition, Claus Vistesen, Head of Eurozone Economics at Pantheon Macroeconomics, said that: “the underlying trend is still weak, consistent with the surveys, indicating that German manufacturing will remain in recession through the third quarter”, reports the Financial Times newspaper.

Also, this morning we’ve learnt that German industrial production fell by -0.6% in July month-on-month, contributing further to this decline.

This has weakened the euro, first because these pessimistic statistics suggest that Germany’s economy could contract in Q3, between July and September.

Already, Germany’s economy shrank by -0.1% in Q2. So if German GDP (Gross Domestic Product) shrinks again this quarter, Germany would enter a technical recession. This could conceivably weigh on the rest of the Eurozone too.

Pound Versus Euro Might Be Influenced by UK Economic Weakness, ECB Meeting

Meanwhile, looking ahead, the pound to euro interbank exchange rate could be influenced in the foreseeable future by growing signs that the UK economy is decelerating, plus the European Central Bank’s (ECB) interest rates decision next week.

In particular, we’d expect the UK’s economic slowdown to affect the pound, while the ECB’s meeting might influence the euro.

The value of sterling might be affected by the UK’s economic deceleration, looking forward, because this week we’ve learnt that UK economic activity continues to weaken.

To be specific, according to IHS Markit’s PMIs (Purchasing Managers’ Indices) this week, UK manufacturing and construction remain in a deep downturn, while UK services activity is expanding minimally.

According to Chris Williamson, Chief Business Economist at IHS Markit, these PMIs indicate that UK GDP might contract by -0.1% in Q3, over the Summer. Already, the UK economy shrank by -0.2% in Q2, between April and June.

So if the UK economy goes backwards for two consecutive quarters, we’d technically enter recession. This would be the UK’s first downturn since the 2008 global financial crisis.

Meanwhile, the euro might be influenced next week by the European Central Bank’s interest rate decision, due on September 12th.

In particular, it’s thought that the ECB could cut its deposit rate, which it charges commercial banks to park money at the ECB overnight, further below -0.4%. The ECB could also restart Quantitative Easing (QE), its program of injecting vast sums of euros into the Eurozone’s financial system.

If the ECB cuts interest rates and restarts QE next week, it would be with the intention of supporting the Eurozone’s slowing economy, in particular Germany’s.

However, lower interest rates are a sign of economic weakness, while printing large quantities of euros devalues the common currency. So the ECB’s actions on September 12th might influence the euro, which may be worth watching for.

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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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