The sterling vs euro interbank exchange rate has reached 1.1646 in the last day. This is just 0.02% below its recent 26-week high, its strongest since May 8th, reached last October 21st, at 1.1649.
By comparison, back on August 10th, the pound to euro interbank exchange rate was as weak as 1.0646. So sterling has since strengthened by 10 cents, or by 9.39%.
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One reason why British sterling has neared this 26-week high against the so-called common currency in the last day is because the Eurozone’s economy continues to show signs of weakness.
However, looking to the next five weeks, the pound to euro interbank exchange rate could be affected, by the UK’s upcoming general election on December 12th, and the uncertainty meanwhile.
In particular, it’s unclear if the Conservative Party will gain a Parliamentary majority, or if Labour might form the next government, or if there’ll be a ‘hung’ Parliament, in which no one party wins.
Pound Euro Exchange Rate Nears 26-Week High, as Eurozone Economy Weak
As I mention, one reason why the sterling vs euro interbank exchange rate has neared this 26-week high in the last day is because the Eurozone’s economy continues to show signs of weakness.
In particular, so far this week we’ve learnt that the euro area’s manufacturing sector continues to shrink, while Germany’s factory orders fell rapidly in September compared to the same month in 2018.
According to economics watchdog IHS Markit this Monday 4th, the Eurozone’s manufacturing PMI (Purchasing Managers’ Index) reached 45.9 in October. This was marginally above the financial markets’ forecasts for 45.7, as well as September’s figure of 45.7, reports Reuters.
However, it’s still well below the 50.0 number that separates economic growth from contraction, so points to a steep decline.
Meanwhile, this morning we’ve learnt that Germany’s factory orders dropped by 5.4% in September year-on-year. This was above economists’ predictions for a sharper 6.2% fall, as well as August’s result of minus 6.5%.
Nonetheless, this tells us that Deutchland’s manufacturing sector continues to produce significantly less than 12 months ago, weighing on Germany’s economy.
It’s thought that the Eurozone’s and Germany’s economies are slowing, because of the USA’s and China’s trade war. Over the last 16 months, Washington and Beijing have imposed tariffs worth hundreds of billions of dollars on each other, to vie for economic dominance.
Yet ironically, this has hurt economies worldwide, and the Eurozone has arguably suffered the most in the dispute.
Yesterday, US President Donald Trump announced that he might reduce some tariffs he’d imposed on China in September, and cancel new tariffs planned for mid-December.
This is because, later this month, Mr. Trump and his Chinese counterpart, President Xi Jinping, are set to sign a “first phase” trade truce, to end their dispute. So Mr. Trump may wish to demonstrate some good will.
However, while we might expect this to ultimately benefit the Eurozone’s economy, and so influence the value of the euro, it’s too soon for Mr. Trump’s upbeat rhetoric to affect the euro area.
To the contrary, until we see definite signs of progress in the USA’s and China’s trade dispute, the Eurozone economy could remain down in the dumps, with contracting manufacturing activity.
For example, Kit Juckes, chief strategist at Societe Generale, writes that this is “A reminder that until the German economic outlook improves, the euro will lag others.”
Meanwhile, Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, says that: "Yesterday’s final manufacturing PMIs for October were grim, but they told investors nothing they don’t already know."
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Sterling Vs Euro Exchange Rate Might Be Affected by Upcoming UK Election
However, looking to the next five weeks, the pound to euro interbank exchange rate could be influenced by the UK’s forthcoming general election, due on December 12th.
In particular, the financial markets may feel uncertain about the UK’s future economic and political direction, until we know the results from the ballot boxes on December 13th, and the next government is formed, according to FX Street.
According to the latest Observer/Opinium polls, the Conservative Party stands at 42%, compared to the Labour Party’s 26%, the Liberal Democrats’ 18%, and the Brexit Party’s 9%.
Traditionally at UK general elections, a 10% lead has been enough for the winning party to gain a majority of MPs in Parliament.
That said, it’s also believed that this upcoming election is the most uncertain in recent history. This is because the British voting public appears more likely to switch its votes than any time recently.
For instance, according to a recent ICM survey, more than 10% of Conservative and Labour voters at 2017’s election now say that they’ll support the Brexit Party or Liberal Democrats.
What’s more, there’s also a significant degree of election uncertainty, because under the UK’s First Past The Post electoral system, the party with the most votes takes all.
There’s no proportional representation, in which the number of MPs assigned reflects the percentage of votes that each party has won. Under this electoral system, it’s difficult to predict which party might win where.
Already, the world’s money managers are investing their efforts to predict who’ll enter No. 10 Downing Street on December 13th.
For example, Adam Cole, a strategist with RBC Capital Markets, says that: "Parliament will be dissolved today, paving the way to the December 12 election and leaving markets to focus on opinion polls and election predictions for the next five weeks."
However, although the forthcoming election looks particularly uncertain, it’s important to note that a ‘No Deal’ Brexit looks like a low possibility.
This is because all the main political parties, except Nigel Farage’s Brexit Party, are campaigning on the UK exiting the EU with an agreement. So even with the ups-and-downs in the opinion polls, this too could influence the pound sterling.
GBP to EUR Rate Could Be Impacted, by Odds of Tory Win or Hung Parliament
In particular, the sterling vs euro interbank exchange rate could be affected over the next five weeks, because many investors on the financial markets are focusing on two possible outcomes at the UK’s forthcoming general election.
These are the odds that the Conservative Party may win an outright majority, or alternatively, a ‘hung’ Parliament, in which no single party gains a majority of MPs.
For example, Kim Mundy, a strategist at CBA, writes this week that: “Recent polls of voting intentions show the Conservative party’s lead is widening and they could achieve a majority government.”
“This raises the likelihood the Withdrawal Agreement that PM Johnson reached with the EU becomes the most likely future Brexit path.” So this is one possible election outcome.
Alternatively, Ketish Pothalingam a manager at Pimco, says that: "In the event of a hung Parliament, uncertainty will likely persist. This outcome could lead to a further Brexit delay, a ratification of Johnson’s Brexit withdrawal deal, or even a second Brexit referendum.”
This then is another possible outcome of next month’s ballot, which is receiving visibility on the financial markets.
This Monday 4th, Nigel Farage’s Brexit Party announced that it would field candidates at all 600 of the UK’s constituencies, according to The Guardian newspaper. This adds further complexity to the political outlook, because Mr. Farage could win votes from other parties.
Following Mr. Farage’s announcement, we’re yet to see how the Brexit Party performs in the polls. If Mr. Farage’s party climbs, this could increase financial investors’ concerns that there’ll be a ‘hung’ Parliament.
In this event, the House of Commons may continue to struggle to pass a Brexit agreement. It’s even possible that Brexit might have to extended again beyond January 31st.
Roberto Mialich, a strategist at UniCredit, says that: "The further extension of the Brexit deadline and the electoral contest in Britain could leave sterling stuck in a sort of limbo where the currency may become more sensitive to electoral polls rather than to the ongoing Brexit debate."
So we’ll see what happens in the polls in the coming weeks, and how this affects the pound.
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