Pound/Euro Parity Looming?
Moneycorp, 21 Dec 2009
Businesses could be in for a nasty Christmas Present this year as the markets dip, bringing a fragile pound ever closer to parity with the euro
December 2009: With the traditionally volatile Christmas period approaching, the festive season could be filled with more fear than cheer for sterling. There are several reasons to suspect that the pound could hit parity against the euro before the end of the year.
The Christmas and New Year period is typically illiquid in the currency markets and, whilst away from the office, investors will shy away from riskier currencies such as the pound and into the relative safety of the euro and dollar. Last year sterling reached a low of 1.025 euros on 30th December 2008, and there is little to stop another attack towards parity this time round.
Mark Deans, Dealing Manager at Moneycorp, commented:
“The data coming out of the economy suggests that we are not completely out of the woods, with many predicting that a double-dip recession is on the cards. Manufacturing growth is still slowing, unemployment is rising and the UK is the only G20 economy still in recession.
If previous market trends at this time of year are anything to go by, the pound could plummet over the festive period, especially as the UK economy is still fragile. It would be prudent for businesses to seek guidance from a foreign exchange specialist to mitigate against this risk.”
Other concerns about the UK economy are further denting the pound’s wellbeing, with any worries likely to be exacerbated during the quiet Christmas period. Analysts and consumers share concerns that the UK will recover slower than elsewhere in the eurozone and further afield, with GDP growth in the UK currently being outdone by most other major economies.
Further pressure has been put on the pound by investors fearing inflation caused by quantitative easing, given that output is growing above average due to the Bank’s injection of more cash into the economy.
The political environment is also having a clear impact on sterling – fears of a hung parliament with no clear political mandate have been detrimental to the currency and will continue to be so into the New Year. Recent declines in the pound also suggest that there is a growing wariness about the UK's national debt.
UK businesses importing from the euro zone will be the hardest hit if sterling were to reach parity with the euro. Exporters to the region could see the opposite effect in such a situation and continue to benefit from the pound at these levels. Either way it would be prudent to keep up-to-date with the latest market movements to ensure UK commerce is prepared for whatever sterling has in store.