by Patrice NOVOTNY The Brexit-hit British pound threatens to reach parity with the euro -- and is already worth less than the European single currency for many travellers seeking to exchange cash at airports.
Sterling went into freefall after Britain voted in a shock referendum last year to leave the EU, sparking fears over the nation’s economic outlook.
The pound was trading at approximately 1.3072 euros as voters headed to the polls on June 23, 2016.
This week, sterling stood at about 1.0850 euros, a dramatic 17-percent slump since the referendum.
“There is certainly a possibility for euro/pound to hit parity,” said analyst Fawad Razaqzada at trading firm Forex.com.
The British currency had clawed back some of its immediate losses as investor nerves subsided after the vote.
But in recent months the economic growth prospects in the 19-nation eurozone have improved, intensifying speculation the European Central Bank will wind down crisis-era stimulus measures.
As a result, the European single currency has been in the ascendancy, scaling this week a 2.5-year pinnacle against the dollar.
– Pound back in doldrums – The pound has taken a heavy knock from the euro’s comparative strength.
“The pound’s sharp drop since April was chiefly due to the political turmoil in the UK and the fact the Bank of England refused to turn hawkish despite an uptick in inflation,” Razaqzada said.
“At the same time, economic data in the eurozone started to improve, which aided the euro’s recovery.”
In line with many experts, Razaqzada cautioned that the shared eurozone unit could tip lower if the ECB fails to announce plans to taper its so-called quantitative easing (QE) stimulus.
At the same time, the Bank of England (BoE) could be forced to lift interest rates if Britain’s annual inflation rate gallops unexpectedly higher.
High interest rates make currencies a more attractive bet for investors because they offer a greater rate of return.
Nevertheless, with the clock ticking on Britain’s EU departure — which is set for March 2019 — the pound could face more stumbling blocks in the near future.
“The upside for euro/pound is limited, but given the ongoing Brexit uncertainty I would not be surprised if the (pound) exchange rate eventually rises to 1.00 euro,” Razaqzada concluded.
The BoE cut its key interest rate to a record-low 0.25 percent in August 2016, in order to combat the economic fallout of Brexit — but this has weighed on the pound.
The economy eked out slender growth of 0.3-percent in the second quarter, up from 0.2-percent in the first quarter, contributing to the uncertain outlook.
BoE governor Mark Carney recently warned that high inflation — triggered by a Brexit-fuelled slump in the pound — had hurt consumer spending, a key engine of the economy.
Euro-pound parity could therefore place household expenditure under even greater strain.
– Airports firms take advantage? – At the same time, British tourists seeking last-minute euros are already facing the prospect of euro parity in airport bureau de change desks, a recent study showed.
The average exchange rate stood at 95 euro cents to the pound at 16 major British airports, according to a survey conducted by foreign exchange broker FairFx.
However, FairFx warned that airport foreign exchange operators were “taking advantage” of “captive” customers who had no other choice to buy their holiday euros.
Frustration at the high euro rates has meanwhile bubbled over on social media, particularly at London’s Heathrow.
“One pound gets you under one euro at Heathrow airport,” exclaimed one Twitter user, posting a picture which showed the pound conversion rate at 0.9494 euros.
“That’s possibly the wackest rate I’ve ever seen! Thanks Brexit.” DM