Euro-sterling parity ‘on the horizon’

EURO-sterling parity is becoming increasingly more likely by the start of next year. That would put pressure on Irish exporters and the tourism industry, say currency experts.

They predict that sterling, which is almost a fifth lower than in August 2007, is likely to weaken further over the coming months. BNP Paribas said the pound may reach parity with the euro in the first quarter of next year while Citigroup forecast it would exceed parity.

The Bank of England said recently that sterling’s long-run value may have been fundamentally undermined by the financial crisis. A weaker pound pushes up the price of goods imported into Britain and makes it more expensive for Britons travelling elsewhere in Europe on holiday.

Bloxham Stockbrokers chief economist Alan McQuaid said: “We still think that as the UK economy recovers over the coming quarters sterling will appreciate back to the 0.80 level versus the euro.

“That said, if the Bank of England is right in its assessment then further sterling weakness cannot be ruled out in the months ahead, which would be bad news for Irish ‘indigenous’ exporters.”

Implied volatility from options trading monitored by Bloomberg yesterday showed the pound has a less than one-in-five chance of weakening to parity with the euro by the end of the first quarter of next year,

Chief executive of currency exchange firm FairFX, Stephen Heath, said it is now much more expensive than it was during the summer for British tourists in the eurozone. He said tourists will have to pay about 8% more for euro.

“At some UK airports rates are already close to or at parity for sterling against the euro,” he said.

The pound bought €1.47 at the start of the credit crunch in the summer of 2007. It now buys around €1.07 or 99c on the worst rates in airports.

Also, exports to Britain could come under renewed pressure as sterling starts to lose the major gains made since March. Broker Caxton FX also said parity between sterling and euro was becoming a real possibility.

“The UK is so led by the financial sector that any negative news means the pound plummets. Investors have lost confidence in the UK economy and seen the fragility of the banking sector underlined,” said analyst Duncan Higgins.