When will Sterling hit Euro parity?

I caught a good article in today’s Guardian about the British Pound.  The question is: how weak will Sterling get?  My answer is below 1-to-1 with the Euro.  But before I tell you why, let me interject a blurb from the article.

The world’s foreign exchanges were today readying themselves for parity between sterling and the euro after further selling sent the pound to within touching distance of a one-for-one exchange rate against the European currency.

Fears of a severe UK recession in 2009, the weakness of the dollar prompted by the Israeli attacks on Gaza and thin post-Christmas trading all contributed to a 2% fall in the pound yesterday. At its lowest point this morning the pound was worth €1.0265, slightly up on the previous day’s low of €1.0198.

The euro has risen by almost a third against the pound in the course of 2008, with an 18% appreciation in December alone. Sterling’s trade-weighted index against a basket of currencies fell to 74.2% of its 2005 value, its lowest since the Bank of England first kept daily records in 1990.

Although the cheaper pound makes UK exports more competitive on world markets and encourages foreign visitors to Britain, it also means dearer imports and makes overseas travel more expensive.

Financial markets believe that UK interest rates – already at a record-equalling low of 2% – will be cut further in the new year as the Bank seeks to revive an economy that is on course to suffer its weakest year since the early 1980s.

Edward here. As much as I hate singing the same tune as everyone else, I have to agree with the tenor of the article.  The U.K. will suffer some horrific mortgage default levels in 2009.  I guarantee you that puts Mervyn King into a dovish frame of mind.  What’s more is the Europeans are not going to do the same.

“There’s a sense that UK rates will fall closer to zero, and that the Bank may be forced into some sort of quantitative easing, while there’s no sense of that in the eurozone,” said Daragh Maher, senior currency strategist at Calyon in London.

Well said.  I should also point out that going to zero gives one no incentive to use the repo market and it makes money fund yields after fees below zero.  This is what is hapenning in the United States and is one reason I see the Dollar lower.  The Europeans are not going to do the same.

But I am betting the BoE does.

Sterling within a whisker of parity with the euro – Guardian


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.