Pound-euro parity by next week, predict analysts

POUND-euro parity is likely to happen in the next week, according to the Bank of New York, which said it is possible considering market liquidity is as thin as it is.

“Talk the Bank of England will cut interest rates again in January, and cut them aggressively, weighed heavily on the pound,” said Simon Derrick, chief currency strategist at Bank of New York.

The pound fell for a second day versus the euro yesterday.

Traders are increasing bets the Bank of England will lower interest rates to revive the British economy.

The British currency also dropped versus the dollar after John Gieve, the central bank’s deputy governor said policy makers need new instruments to tackle the crisis.

Also Italy’s UniCredit said it remains bearish on the pound “across the board”.

“Technical momentum, psychology and sentiment, coupled with current macroeconomic and political fundamentals, still suggest further pound weakness ahead,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank.

“The currency markets are likely to ring in the new year with a one for one euro against the pound,” said Mr Jones.

The pound has declined 22% against the euro this year as the Bank of England reduced its main interest rate to 2% from 5.5%.

The currency has dropped 25% versus the dollar.

However UBS, the world’s second largest currency trader, said investors should maintain “caution” when betting that the pound will drop to parity with the euro anytime soon.

“Sterling remains under pressure as the Bank of England seeks to continue moving aggressively on rates, but we caution against chasing parity in the current environment,” Geoffrey Yu, a foreign-exchange strategist at UBS said.

The British economy shrank more than expected in the third quarter as service industries including financial companies, hotels and restaurants declined the most since 1990.