Could we be heading for a three-way exchange-rate tie?

Sterling exchange rates often have the biggest impact on indigenous Irish firms

The UK currency breached 90p against the euro for the first time leading people to ask whether we are looking at parity for the first time

The UK currency breached 90p against the euro for the first time leading people to ask whether we are looking at parity for the first time

 

Two days after the Central Bank published its latest economic forecasts – lowering its estimates for a second time since the Brexit referendum – they may already be out of date.

Sterling’s slide against the euro since the referendum gathered a whole new pace this week after British prime minister Theresa May signalled that we are set for a so-called hard Brexit, as her plans to regain sovereignty over immigration appears irreconcilable with maintaining full access to EU markets.

The UK currency breached 90p against the euro for the first time in more than five years on Friday and the chatter in currency markets was whether we are looking at parity for the first time. The closest to this scenario was at the end of 2008, when the rate hit 97.5p.

The Central Bank’s latest estimates – for gross domestic product to expand by 4.5 per cent this year and 3.6 per cent in 2017 – were set against an exchange rate of 84p. It has since moved by more than 7 per cent.

Flexible

The organisation’s head of Irish economic analysis, John Flynn, during the week, said the fact that Ireland’s economy is more flexible now than in the past leaves it in better shape to deal with currency movement, though if the current rate persists, it will have an impact.

But he noted that for some sectors, particularly in food, clothing and footwear, as well as tourism, the euro-sterling rate is more important than many other areas of the economy.

Of more concern, however, is that the rate is generally more important for indigenous Irish firms, because the UK accounts for a greater share of export markets for these companies than large multinationals based in Ireland.

Still, the bank highlighted that demand for goods and services in trading partners’ markets is much more important than currency rates. It’s anyone’s guess how that will hold up in the UK over the next few years as Brexit negotiations take place.

Meanwhile, the number of options traders betting on sterling reaching parity with the dollar also jumped yesterday, with a Bloomberg forecasting model throwing out a 7 per cent chance of it happening within a year. That’s more than double the rate implied the day before.

What are the chances of first time ever three-way exchange-rate tie?

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