Is sterling about to hit parity with the euro? Here's what analysts think

 
Jasper Jolly
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The pound now buys much less in foreign climes (Source: Getty)

Money has poured into the euro in recent months, prompting talk once more among analysts of parity with the pound.

The euro has risen to levels not seen since late 2014 on a trade-weighted basis, according to figures tracked by the European Central Bank (ECB). Sterling, a major part of that index, has lost more than seven per cent over the course of 2017.

In this morning’s trading sterling hit lows of €1.0827, leaving a significant way for sterling to go before hitting parity, despite it briefly hitting an eight-year low this week.

Read more: Sterling hits eight-year low against the surging euro

However, the prospect of a tightening of ECB monetary policy – albeit painstakingly gradual – at the same time that the Brexit process is starting to get serious has brought parity discussions back into play.

Paresh Davdra, chief executive of forex firm RationalFX, said: “Sterling’s latest stumble against the euro has once again raised analyst speculation of parity with the euro for the first time in the shared currency’s history."

While there has been no massive downwards trigger from the sterling side, Brexit negotiations this week have given investors little reason to buy the pound either.

Davdra added: “With the uncertainty surrounding Brexit likely to persist for some time, investors will continue to view the euro as a safe haven compared to volatile sterling and the weak dollar. With the approach of quantitative easing tapering, the euro’s strength against its major peers also shows little sign of slowing.”

It is quantitative easing (QE) which has held investors in thrall over the summer, as a strengthening Eurozone economy has raised the prospect of the removal of some stimulus from the ECB.

Read more: Why is the euro surging against sterling and the US dollar?

The ECB is currently buying €60bn in bonds per month, with the programme due to run out in December. A decision is therefore imminent on how far to extend the programme, and at what rate. Investors expect ECB president Mario Draghi to announce a gradual taper in purchases.

The expectation of tighter monetary policy has, in the absence of hawkish messages on the other side of the Atlantic or in the UK, driven up the euro. But that in turn may drag back inflation in Europe from the key two per cent annual target rate.

That disinflationary pressure could prompt Draghi to try to talk down the euro soon, which could help the pound, according to Richard Falkenhäll, senior forex strategist at Nordic bank SEB.

He said: “A softer message from the ECB aimed at avoiding further euro strength is not that unlikely at the next meeting.”

Analysts at Capital Economics also think the British economy will give investors reasons to buy the pound and fend off parity. Growth has been weak in recent quarters, with consumer confidence still low, but a rebound to match business surveys is due, according to Paul Hollingsworth, an economist at the firm.

Interest rate hike expectations for the Bank of England over the next two years are also unrealistically low, he said. If these start to rise, the pound will rise as well.

Read more: DEBATE: ­­Should we be concerned about sterling/ euro parity?

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