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Sterling Vs Euro Near 31-Month High, as Odds of Tory Win Rise

Market CommentarySterling Vs Euro Near 31-Month High, as Odds of Tory Win Rise
Sterling Vs Euro Near 31-Month High, as Odds of Tory Win Rise
Pound Euro Exchange.

The sterling vs euro interbank exchange rate stands at 1.1855 today. This is 0.04% below the pound’s recent 31-month high against the euro, its strongest since May 11th 2017, reached yesterday, at 1.1860.

By comparison, back on August 10th 2019, the pound was as weak as 1.0646 versus the Eurozone’s common currency. So it’s since risen by 11.35%, or by over 12 cents.

This could benefit you, if you need currency for tuition fees, for your son or daughter to study at a European university, or you’re making regular payments for your Spanish or French mortgage.

This is because, when you transfer money to Spain or France from the UK, you might get a higher euro total, compared to if you’d exchanged currencies over the last 31 months.

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, 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, go to our GBP to EUR Exchange Rate Updates page. Here, just click on the newest article.

One reason why the GBP to EUR interbank exchange rate stands near this 31-month high today is because the odds of a Tory majority win at next week’s UK election have apparently risen.

Another factor why the sterling vs euro interbank exchange rate has strengthened, is because if there’s a decisive result to next week’s election, UK economic growth may accelerate in 2020/1.

However, looking to the six days remaining until the UK’s general election, the pound’s value versus the euro might be affected, if the opinion polls start to show that the race is tightening.

Pound Euro Exchange Near 31-Month High, as Chances of Tory Majority Increase

As I mention, one reason why the pound to euro interbank exchange rate stands near this 31-month high at 1.1855 today, is because the financial markets have increased the probability that the Conservative Party will win a majority of MPs, at next Thursday 12th December’s UK general election.

If a single party wins next week’s vote, this may provide political stability to the UK in 2020.

In particular, the world’s money managers have increased the odds that the Tories will win a majority of seats in the House of Commons, by 2%, up to 72%.

This is the highest percentage since the UK general election campaign began some weeks ago. It tells us that global investors are increasingly confident that Prime Minister (PM) Boris Johnson’s party will win a majority next week.

The financial markets feel increasingly confident that PM Johnson’s Tories will secure a majority of MPs next week, because the latest opinion polls point to a consistent Conservative lead.

For example, according to the “poll of polls” from Britainelects, the Financial Times and the BBC, the Tories are at 42% support. This is 10% ahead of Jeremy Corbyn’s opposition Labour Party’s 32%.

Moreover, global investors are increasingly factoring in the probability of a Conservative victory, because yesterday three Brexit Party MEPS defected to the Tories.

To be specific, Annunziata Rees-Mogg, Lance Forman and Lucy Harris switched from Nigel Farage’s party to PM Johnson’s. They argued that the Brexit Party risks dividing the “Leave vote”, and putting Brexit itself at risk.

Traditionally, a 10% lead has been enough for the first-place political party to win a majority of MPs, under the UK’s First Past The Post (FPTP) political system.

Moreover, unlike polls last week that showed the Tories’ support falling while Labour was rising, the latest surveys suggest that PM Johnson’s party’s lead has stabilised, at around 42%. So this gives confidence to investors.

For example, strategist Petr Krpata writes that "With the Conservative Party leading the polls, GBP is likely to gain over the 1-2 months as we get more clarity on the Brexit path."

In general, the world’s money managers want a single political party to win next week’s UK election.

This is because it’s thought that, this way, Brexit may be resolved faster, the UK can get on with negotiating its future trade deal with the EU, and work on its domestic priorities such as schools and hospitals. With this in mind, investors’ confidence of a Tory win is supporting sterling.

GBP to EUR Gains, as Clear Election Result May Strengthen UK Economy in 2020/1

Furthermore, another factor why the sterling vs euro interbank exchange rate has neared this 31-month high today is because it’s thought that, if next Thursday’s UK general election delivers a decisive result, this could accelerate the UK’s GDP (Gross Domestic Product) growth in 2020/1.

In turn, this could make investing in the UK more attractive in the near future, so lifting sterling.

For example, Holger Schmieding, Chief Economist at Berenberg Bank, says that "If Johnson wins, expect medium-term UK economic growth to far exceed the European average for around 18 months."

Mr. Schmieding forecasts that, if the election result is decisive, UK GDP expansion might increase from 1.3% in 2019, up to 1.8% in 2020, then 2.1% in 2021, a sharp acceleration.

In particular, it’s thought that the UK’s GDP growth might accelerate next year, if the election result is decisive, because this way Brexit could be resolved faster.

After all, if a majority of MPs approve Brexit before the current deadline of January 31st 2020, this would provide greater certainty to British businesses. In turn, they may be likelier to hire and invest, strengthening growth.

This is especially the case, because since the UK’s referendum vote for Brexit in June 2016, the UK’s economic growth has been subdued.

To be specific, firms have held off contracting new employees or buying new technology, until there’s clarity about the UK’s future relationship with the EU. So if the election result deliver this clarity, this “pent up” investment could be released.

By comparison, the Eurozone’s economic growth stood at just 0.2% in Q3 2019, from July to September. In part, this is because the US/China trade war is weighing down Germany’s manufacturing sector, arguably the euro bloc’s engine room.

So according to Mr. Schmieding, UK GDP growth could exceed the Eurozone’s in the next 18 months, thereby benefiting the pound.

Sterling Vs Euro Might Be Affected, if Election Polls Show Race Tightening

However, looking to the six days remaining until the UK’s general election, the pound to euro interbank exchange rate could be affected, if the opinion polls show the race tightening.

In particular, the financial market remain concerned about the possibility of a ‘hung’ Parliament, in which no single political party wins a majority of MPs. This could extend the Brexit uncertainty.

The world’s money managers continue to watch the opinion polls carefully, because although the Conservatives’ lead appears stable at 10%, their lead only has to drop by 3%, to around 7%, to enter what’s known as ‘hung’ Parliament territory.

This might mean either the Tories dropping from their current 42% support, to 39%, or Labour rising to 35% support, from their present 32%.

In this case, although a UK government might be formed next Thursday, this could have difficulties finalising Brexit, or passing domestic legislation about transport or hospitals.

If this happens, then Parliament might again run up against the Brexit deadline, this time of January 31st 2020, either raising the risk of a “No Deal” Brexit, or obliging MPs to request more time from Brussels.

In turn, if next week’s election result isn’t decisive, then British business owners might continue to delay their hiring and investment decisions next year.

As we’ve seen in the three years since the referendum vote for Brexit, this has decelerated UK GDP growth. Given this, there might be fewer investment opportunities in the UK than if the election is decisive, thus weighing on sterling.

For example, Joshua Mahony, analyst at IG, says that "a hung parliament [would leave] Johnson scrambling to form a government with parties which have rejected the deal Boris is pushing.”

Meanwhile, Erik Nelson, strategist with Wells Fargo, says that "A Conservative majority is far from guaranteed. If Conservatives do not secure a majority, the Bank of England may cut [interest] rates” below their current 0.75%.

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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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