Further sterling slide seen as likely

What once seemed a highly unlikely call on euro-sterling is gaining momentum, with two of the world’s leading banks predicting that euro will attain and even go beyond parity with the pound for the first time.

Morgan Stanley sees the pair at 102 pence by the end of March, which represents a 12% gain for the euro from current levels, while HSBC is sticking to its forecast that the euro will trade one-for-one against the pound by year-end.

Standard Bank strategist Steve Barrow said: “It’s not a huge leap of faith to suggest we could get up to the parity area.” It would be “foolhardy” to rule out the prospect of the euro reaching the one-pound mark, according to Rabobank International’s senior currency analyst Jane Foley.

The euro has surged more than 6% against sterling this year amid speculation that the ECB will announce a tapering of bond purchases by autumn. By contrast, the pound is being held down by uncertainty surrounding Brexit negotiations.

“In euro-sterling we’ve had a very strong conviction and it’s one of the biggest forecasts I ever remember making on a major currency,” David Bloom, HSBC’s London-based global head of currency strategy said in an interview last week.

That’s “a 20% move and that’s quite something. It’s very unusual that we make such, what was at that time, an outrageous forecast” but “we are roughly half way there and we believe in it,” he said. Bloom first made his parity call a year ago, when the euro was around 83p. HSBC predicts the euro and the pound ending this year at $1.20, which are both “strong views,” he said.

Euro-sterling was trading yesterday at 90.8p, having reached almost 91.2p last week, its strongest level since October. The pair reached a record 98p in December 2008.

Since France elected pro-European leader Emmanuel Macron in May, risks of the currency bloc fragmenting have diminished. In addition, eurozone economic data are showing signs of improvement. In contrast, Brexit negotiations are far from clear and that’s weighing on sterling. That’s the main concern for Standard Bank’s Barrow. It all “depends a lot of how the Brexit negotiations go,” he said. “On euro-sterling previously we thought the 90-92 area might be the peak, but obviously now I no longer do.”

While Morgan Stanley’s parity call is partly due to a bullish-euro outlook, the UK currency is “likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks,” Hans Redeker, head of foreign-exchange strategy, said.

Bloomberg