Euro parity for the pound?

I might be shot down in flames in predicting this but somehow I doubt that we will reach parity against the Euro.

It is the nature of currency markets to overshoot when the external value of a currency is making a long over-due correction. Notice how stable the sterling –euro rate was between the years from 2003 through to the summer of 2007. It was almost as if the UK economy had locked itself into a fixed exchange rate against the Euro!

Sterling’s weakness can be put down to several macroeconomic factors:

Steep cuts in official policy rates by the Bank of England A dramatic weakening of the real economy with growth forecasts being slashed A downgrading of expected real returns from overseas investment in the UK Expectations that the UK economy will be badly affected by the extended fall-out from the credit crunch – given the huge indebtedness of the personal and government sector

But to move from where we are now to parity between sterling and the euro would represent an exchange rate movement well out of proportion to any economic fundamentals. Will the central banks permit it?

Remember that the European Central Bank is behind the curve when it comes to making interest rate reductions and the pressure will be on the ECB to move further in the early months of 2009 as inflationary pressures subside and the Euro Area moves deeper into recession.

The Guardian: Speculators push pound to record low against euro