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Sterling Vs Euro Rises, on Hopes for Higher Government Spending

Market CommentarySterling Vs Euro Rises, on Hopes for Higher Government Spending
Sterling Vs Euro Rises, on Hopes for Higher Government Spending
Pound Euro Exchange.

The pound to euro interbank exchange rate stands at 1.1712 today. By comparison, yesterday sterling was as low as 1.1636 versus the Eurozone’s common currency. So it’s since strengthened by 0.65%.

The GBP to EUR interbank exchange rate has strengthened, in part because markets are increasingly focused on the possibility that, in the UK government’s upcoming Budget in March, Chancellor Sajid Javid will loosen the public purse strings.

It’s thought that Mr. Javid could announce up to £100 billion in new public investment, to be spent mostly outside the South-East.

Speaking on the BBC on January 7th, Mr. Javid said that "There will be an infrastructure revolution in our great country. We set out in our manifesto during the election how we can afford to invest more.”

When the government spends more, this tends to increase the UK’s economic growth. So this anticipation for higher UK government spending has lifted the pound.

UK Economy Shows Post-Election “Green Shoots”, Supporting Pound

Another factor why the sterling vs euro interbank exchange rate has risen is because the UK’s businesses look increasingly likely to invest more, as well as the government.

Since the UK’s general election last month, in which the Conservative Party won a clear victory, there have been signs of growing confidence among British companies.

For example, according to IHS Markit’s UK services PMI (Purchasing Managers’ Index) for December last week, UK firms feel more upbeat about the outlook, as the Tories’ election win has brought a degree of Brexit clarity.

Also, Deloitte’s latest quarterly survey of UK business confidence reveals a similar trend, while UK house prices have risen notably since the election too.

Marc von Grundherr, Director of Benham and Reeves, says that "Last month’s election helped to reignite the smouldering embers of an otherwise weary property market." This too has contributed to lift the value of the pound against the euro recently.

If UK Economy Accelerates, BoE Less Likely to Cut, Benefiting Sterling

With this in mind, if both the UK government and businesses spend more, the Bank of England may feel less inclined to cut UK interest rates early this year.

Speaking last week, BoE Governor Mark Carney told a Research Workshop that, unless UK GDP (Gross Domestic Product) accelerates in early 2020, the central bank could cut UK borrowing costs below their current 0.75%.

Later on, Mr. Carney’s colleagues Silvana Tenreyro and Gertjan Vlieghe echoed his remarks. Traditionally, lower UK interest rates tend to weaken the value of the pound.

That said, if the UK economy grows faster in the next few months, this could stay the BoE’s hand. This possibility too has strengthened sterling.

Turning to today, we’ll learn the UK’s inflation figures for December 2019, released at 09.30 GMT. These are forecast at 1.5%, below the BoE’s 2.0% target. A result above or below this figure has the potential to affect the GBP to EUR interbank exchange rate.

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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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