These analysts believe the euro will reach parity with sterling early next year

Emma Haslett
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Sterling could reach parity with the euro by the first quarter of next year. (Source: Getty)

The pound and the euro could finally achieve parity for the first time since the single currency was launched by early next year, as Brexit takes its toll on sterling while the euro continues to strengthen.

A note by analysts at Morgan Stanley suggested the euro could become level with the pound as early as the first quarter of 2018, after the single currency strengthened in recent months, boosted by stronger economic figures coming out of European nations combined with a more bullish outlook from the European Central Bank (ECB).

Meanwhile, the British economy has shown signs of faltering, with expectations of GDP growth falling, pushing sterling lower.

Read more: MEPs could push for stronger reforms to London's euro clearing market

Accordingly, the investment banking giant said the pound was likely to weaken further, "driven by weak economic performance, low real yields and increasing political risks".

"Last year, the British economy maintained its growth momentum even after the Brexit vote, but the structure of growth has changed," said its analysts.

"The household sector has increased spending, primarily funded by unsecured lending, which is unsustainable. A consolidation of the household balance sheet, coupled with negative real wage growth, may reduce consumption, which has been propping up growth so far."

They added a much hoped-for rise in business investment had not materialised, despite weakness in sterling.

"Brexit uncertainty may also weigh on business investment, which will weaken the already lacklustre productivity growth outlook, suggesting real rates staying low.

"[Sterling] weakness did not boost net export growth in a way that is comparable to previous periods of currency weakness."

Half a decade after ECB chief Mario Draghi vowed to do "whatever it takes" to boost the euro, the currency is at a 10-month high against the pound. Today it rose above £0.9063, its highest since October last year.

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