Pound won’t reach parity with euro, say analysts

Sterling hits eight-year low, but most are predicting currency will begin slow recovery

Irish currency analysts have poured cold water on predictions that the euro is headed for parity with sterling despite another marked descent in the value of the pound in recent days.

While the euro snapped a four-day rise against sterling on Thursday, it was still hovering close to 92p, its highest level since October 2009 and more than 20 per cent above its pre-Brexit value.

The latest swing against sterling has prompted a flurry of predictions, led by HSBC and Morgan Stanley, that the UK currency may now be trending towards parity with the euro, long viewed as the doomsday scenario for Irish exporters, who are reliant on sterling's superior purchasing power.

Davy economist Conall Mac Coille noted, however, that the same financial houses were predicting the euro would hit parity against the dollar when the US Federal Reserve starting raising interest rates last year, a prediction that was turned on its head.

“There’s going to have to be more negative news to push it [STERLING)]to parity,” he said, noting that there was now a contrary view in the market that sterling was undervalued from a fundamentals point of view.

‘New normal’

“If you believe Brexit is going to be a structural shock that hurts the UK, the exchange rate will be persistently lower because the growth prospects are weaker, but I don’t think parity is going to be that new normal,” Mr Mac Coille said.

“It’s probably more likely that this Brexit thing is just going to be a drip, drip of disruptive political noise for the next 12 months,” he said.

Investec’s head of foreign exchange Mark O’Brien said his firm was not predicting parity but expecting the euro to drop back to 88p next year.

“We’re still in summer markets and there’s less liquidity in summer markets and when you have a move going, it can be a little bit more exaggerated,” he said.

Despite the diverging economic outlook for the euro zone and the UK and the Brexit uncertainty, Mr O’Brien said the markets had factored much of this in already. Investec’s medium-term view was that the currency would recover from this level against the euro.

Goodbody analyst Dermot O’Leary took a more bearish view on sterling’s prospects, forecasting it was likely to fall further against the euro to 93p by the end of the year and 95p by the second quarter of 2018, but he ruled out parity.

“It’s more likely to weaken from here but getting to a parity level is unlikely in our view,” he said.

Transitionary period

Mr O’Leary said the Brexit negotiations were more and more pointing to a transitionary period rather than a hard break, which “you could put in a soft Brexit category”, an event which would ultimately be more supportive of sterling.

Goodbody’s forecast that sterling was likely to weaken further in the coming months is based on the weakening macroeconomic outlook in the UK, he said, where the consensus growth forecast for 2017 is now 1.5 per cent, down from 1.8 per cent previously.

Morgan Stanley strategists, who have fronting the parity predictions, said on Thursday the British economy may lose growth momentum as the government’s failure to define its Brexit target creates investment uncertainty.

The Office for National Statistics confirmed on Thursday the UK economy grew 0.3 per cent in the second quarter after 0.2 per cent in the first – adding up to the slowest growth for any major advanced economy since the start of 2017.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times