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Sterling Vs Euro Near 2-Week High, on Hopes for UK Rebound

Market CommentarySterling Vs Euro Near 2-Week High, on Hopes for UK Rebound
Sterling Vs Euro Near 2-Week High, on Hopes for UK Rebound

The sterling vs euro interbank exchange rate stands at 1.1821 today at the time of writing.

This is just 0.27% below the pound’s near two-week high versus the Eurozone’s common currency, its strongest since Tuesday 17th December 2019, reached yesterday, at 1.1854.

By contrast, back on Wednesday 25th December, the pound to euro interbank exchange rate was as low as 1.1493. So it’s since strengthened by 2.85%, or by over 3.25 cents.

This could interest you, if you’re a Brit buying property abroad on the Costa del Sol or in the Languedoc, or if you need currency for tuition fees to study at a top university in the Eurozone.

This is because, when you transfer money to Spain or France from the Eurozone, you might get a higher sterling total, compared to if you’d exchanged currencies in the last fortnight.

To stay up-to-date with the pound to 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 sterling versus the Eurozone’s common currency, go to our GBP to EUR Exchange Rate Updates page. Here, simply click on the latest article.

One reason why the sterling vs euro interbank exchange rate stands near this two-week high is because, following last month’s election, it’s hoped that the UK economy will rebound in 2020.

However, looking over the next 12 months, the pound’s value against the euro on the interbank market might be affected, by the UK’s future trade deal talks with the EU, and how long they last.

Moreover, the pound to euro interbank exchange rate could be influenced, by this week’s UK and Eurozone economic data, including British and European manufacturing figures for December.

Sterling Vs Euro Near 2-Week High, on Hopes for UK Economic Rebound in 2020

As I mention, one reason why the pound to euro interbank exchange rate stands near this two-week high at 1.1821 today is because it’s hoped that the UK economy will rebound in 2020.

In particular, this follows last month’s UK general election, in which Prime Minister (PM) Boris Johnson won a large majority of MPs. This may bring greater UK economic and political stability this year.

At the UK’s general election on Thursday 12th December, PM Johnson’s Conservative Party won 365 seats in the House of Commons, compared to the opposition Labour Party’s 202 seats.

Overall, the Tories won a majority of 80 MPs, which it’s thought will enable the PM to pass legislation this year, without having to depend on smaller political parties, or opposition amendments.

By comparison, before last month’s UK election, PM Johnson governed with a minority of MPs in the House of Commons, a situation known as a ‘hung’ Parliament.

This enabled the opposition to frequently band together, to deadlock the UK’s Brexit situation, amend laws, and take control of Parliament’s legislative agenda. This led to UK political limbo, since PM Johnson took office.

As a result, now that PM Johnson enjoys a majority of MPs in Parliament, this may lead to greater UK political stability and predictability this year.

In turn, this may encourage the UK’s businesses and investors to hire new staff or buy more equipment, now that the UK’s Parliamentary outlook is clearer. As a result, this may boost the UK’s GDP (Gross Domestic Product) growth this year.

UK GDP expanded by 0.0% in the three months to October, according to the government’s Office for National Statistics (ONS). This is to say that the economy flat-lined over this period.

With this in mind, we’ll see if the UK economy picks up in 2020, now that PM Johnson has a Parliamentary majority. The ONS releases its first estimate of the UK’s January 2020 GDP on March 11th.

For example, Ulrich Leuchtmann at Commerzbank says that: "What will be decisive long term is how Prime Minister Boris Johnson is going to use his new, clear majority.”

“The possibility of a sustainable Sterling recovery is emerging very cautiously. [Boris] might find it easier to extend the transition period,” adds Mr. Leuchtmann. So this has helped lift the value of sterling.

GBP to EUR Rate Might Be Influenced, by UK’s Future EU Trade Deal Talks

However, looking over the next 12 months, the sterling vs euro interbank exchange rate could be affected, by the UK’s future EU trade deal negotiations, as well as the Brexit transition period.

In particular, PM Johnson has said that he wishes to limit the UK’s future EU trade deal talks to the end of this year, even though such trade negotiations typically take six or seven years to finalise.

The PM announced that he’ll legislate to limit the UK’s Brexit transition period up to December 31st 2020, following the Conservatives’ election win last month.

It’s thought that PM Johnson wishes both to show his commitment to “get Brexit” done, as well as pressure the EU to agree a favourable trade deal quickly. However, the PM’s decision was a surprise to many on financial markets.

After all, lots of investors had thought that PM Johnson would use his larger election majority to “soften” his Brexit stance.

This is because, with a large majority of 80 MPs in Parliament, the PM no longer depends on the votes of smaller groups, such as the European Research Group (ERG) or Northern Ireland’s Democratic Unionist Party (DUP). This gives the PM room to manoeuvre.

However, in the event, PM Johnson seemingly wishes to show that he’s committed to “get Brexit done”, by limiting the trade talks to 12 months.

For the world’s investors, this risks creating a new “No Deal” Brexit cliff edge, in which the PM either negotiates the UK’s future trade deal this year, or risks defaulting to trading with the EU on World Trade Organisation (WTO) terms.

If the UK trades with Europe on WTO terms in 2021, it’s thought that this would include more tariffs and bureaucracy.

In turn, this may make it more costly and complicated to import and export with the EU, which may slow the UK’s future economic growth. With this in mind, much depends on PM Johnson’s agreeing the future EU trade deal within his deadline of this year.

For example, Kamal Sharma at BofA Global Research says that "We have been surprised by how quick the markets have been to readily assume that a sizeable majority would allow the Prime Minister to soften the edges of his Brexit plans.”

“Since the election, the PM has been keen to emphasise that the commitment to leave the transition phase by end-2020 is a manifesto pledge that he intends to adhere to,” adds Mr. Sharma, which may affect the value of sterling.

Pound to Euro Rate Could Be Affected, by UK and Eurozone Data This Week

Meanwhile, turning to the immediate future, the sterling vs euro interbank exchange rate could also be affected by this week’s UK and Eurozone economic data.

For example, this morning we’ve learnt that the UK’s manufacturing sector disappointed forecasts in December, while the Eurozone’s factories exceeded predictions. Tomorrow, Germany’s unemployment data for December is due.

Today, we’ve learnt that IHS Markit’s UK manufacturing PMI (Purchasing Managers’ Index) reached 47.5 last month. This is below both economists’ predictions for 47.6, as well as the 50.0 figure that signals economic growth.

So this data suggests that the UK’s factories continue to produce less, weighed down both by Brexit uncertainty as well as the continuing US/China trade war.

Elsewhere, turning to the Eurozone, factory activity reached 46.3 this month, according to IHS Markit today. Although this is slower than the UK’s manufacturing sector, it’s above the financial market’s forecast of 45.9, as well as the previous figure of 45.9.

So this indicates that, although Europe’s manufacturing sector continues to contract, it’s growing above economists’ predictions.

Turning to the rest of the week, tomorrow Germany’s unemployment statistics and inflation figures for December are due, at 08.55 GMT and 13.00 GMT respectively.

It’s forecast that Germany’s joblessness held at 5% last month, which would be close to its lowest since reunification. Meanwhile, German price pressures are forecast at 1.4%, which would be 0.2% above November’s figure of 1.2%.

However, even if German inflation reaches 1.4% in December, this would remain well below the European Central Bank’s (ECB) target of just below 2.0%.

This would suggest that Germany’s economy remains too weak to generate consistently higher price pressures, and could encourage new ECB President Christine Lagarde to further ease monetary policy. This may affect the euro.

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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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