Why lament sterling reaching euro parity? I say bring it on

Around this time of the year the rate of exchange between pounds and euros becomes one of the most popular “water cooler conversations” and pub chatter.

And with the official rate below €1.10, and even far less generous at bureau de changes, a great many of us can be excused for crying into our pints ahead of holidays in the Eurozone.

The two questions which I’d like to provide my personal answers to are: whether, over the next few years, holidays to destinations in euro-land are likely to become even more expensive. And, I will consider what, if any, the silver linings might be were the pound to head ever lower against the euro.

In trying to establish where the pound may be heading against the euro, one has to deal with a combination of fundamentals and sentiment.

On the latter point, those fixated with “chartism” will argue that the pound has clear downwards momentum against the euro from which they extrapolate even further weakness. Many are suggesting a move towards parity, with some claiming this would then be breached as a result of sheer momentum.

For my part I agree that the pound is heading lower, but for more fundamental reasons. For one, the economic signals emerging from the Eurozone are clearly more favourable than those coming from UK data. Indeed, qualitative measures of consumer and business confidence have revealed a deteriorating sentiment within the UK, all the more so since the “shock” General Election result.

Such evidence of a worsening in the “economic mood” across the UK has happened to coincide with a sense of optimism that the Eurozone is through its worst. Against this backdrop of data one can hardly be surprised that the pound has weakened by over seven per cent against the euro since early May, when those taking an early holiday to Spain, Portugal, Greece, Cyprus, Ireland and elsewhere using the euro would have received seven cents more for their pounds.

Let me turn for a moment to an important determinant of an exchange rate: the respective interest rates on the two currencies being priced against one another. Now those looking to anticipate interest rate policy are increasingly of the view that the Bank of England will lag the European Central Bank in tightening monetary policy.

In many ways it is the “momentum” behind this “fundamental” belief that can be thought of as behind the downward momentum in the pound against the euro, something which has given those keen on technical analysis cause to predict ongoing weakness. Let me be clear I share the view that the pound will head still lower against the euro, and I see no reason why €1.05 should be any form of barrier to it falling to parity.

In fact, until and unless we get clarity on our exit terms from the European Union I see sentiment towards the pound only weakening, certainly in relation to the euro.

So there you have it, I will not stand Canute-like by claiming the pound’s tide against the euro will reverse any time before next summer, or even before the skiing season ends in 2019.

This said, I wish to point out why, aside from feeling hard done by when holidaying around the Eurozone, we should welcome a less affordable euro.

For one, a less affordable euro means a more competitive pound. As much then as the former may discourage us visiting the likes of Spain, Greece et al, the latter adds to the attraction of journeying to the UK, as well as us staycationing.

In broader terms a cheaper pound helps in the long and widely espoused ambition of “rebalancing” the UK economy towards a greater emphasis on us selling our goods and services to others. This would help in narrowing the deficit in our current account which would itself be self-correcting by introducing structural support to the pound.

Let me end with this observation. In mid-September 1992 when the pound rather unceremoniously exited the EMU, it fell dramatically against most currencies across Europe. However, within five years it had more than reclaimed its losses, over which period UK GDP grew each year by an average of three per cent.

Is 2022 too long to wait for a cheap European holiday?

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