Sterling-euro parity forecast as markets despair of easy Brexit
Global bank HSBC has reiterated it expects sterling euro parity by the end of next year in a downbeat analysis, as the pound tipped above the 90 pence mark yesterday.
Sterling settled around 89 pence by the close of business after a so-called 'flash crash' in Asia overnight had sent it briefly to more than 92 pence. It also plunged from around $1.26 to $1.18 in just two minutes.
The reasons for the dramatic weakening are unclear, with traders speculating that a computer glitch could be to blame, or a so-called 'fat finger' trader error.
But one bank suggested a tough speech from French President Francois Hollande, in which he said Europe must stand firm in the face of the 'hard' Brexit rhetoric from Britain, could also be a factor.
In a note to investors, HSBC said the outcome of the Brexit negotiations would be a "lose-lose situation".
"Our forecast is unchanged at 1.20 for GBP-USD by year-end falling to 1.10 by end 2017 with EUR-GBP at parity," said the bank's global head of FX currency, David Bloom.
"Brexit, whether one likes it or not, is a political decision, one we have to respect.
"However, the argument which is still presented to us - that the UK and EU will resolve their difference and come to an amicable deal -appears a little surreal. It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation.
"A lose-lose situation is the inevitable outcome."
Sterling has been falling steadily for a fortnight, as investors fret that the UK government's intention to prioritise immigration controls over access to the single market in exit talks will spark deeper cuts to foreign investment in Britain.
But yesterday was different. Traders in Europe arrived at their desks yesterday to see a sharp weakening overnight in the pound to over the 92 pence mark, and to $1.18.
"As is the norm in the aftermath of a 'flash crash' the market is left scratching heads to ponder where the smoking gun is," said specialist bank Investec, through its Dublin office. "It appears that a no-holds Brexit speech made by the French President, Francois Hollande... may be the key to the mystery."
John Moclair, head of global customer group at Bank of Ireland, said the flash crash marked the low point of what was already a bad week for the UK currency.
"The pound has not experienced moves of this magnitude since the Great Financial Crisis of 2008, and currently trades at levels against the dollar not seen since the mid-1980s," he said. "With the negotiation process for Brexit yet to really start, we're likely to see further impact on the pound."
Meanwhile, Francois Hollande gave a tough response to Theresa May's tough stance at the Conservative Party Conference.
"There must be a threat, there must be a risk, there must be a price, otherwise we will be in negotiations that will not end well and, inevitably, will have economic and human consequences," Mr Hollande said.
"Britain has decided on a Brexit, I believe even a hard Brexit. Well, we must go all the way with Britain's will to leave the European Union."
Earlier in the week German Chancellor Angela Merkel also sounded a warning to the British. She said full British access to the Single Market requires accepting the EU's freedom of movement principle.
Blip or crisis?: Sterling special, p35