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ING: More sterling weakness to come, but euro parity unlikely

The pound will continue to slide against the euro in the coming months and will take longer than previously expected to recover, but is unlikely to reach parity with the single currency, according to analysts at ING.

Foreign exchange experts at the bank have revised their forecasts for euro-sterling, and now predict more short-term pressure for the pound in the face of a crucial month of political events, with the Tory party conference, the final round of opening Brexit talks, and the EU summit all to come in October.

They also predict a more gentle recovery; having previously thought the euro would retract to £0.80 against the pound by the end of 2018, they now predict it will not fall below £0.85 by then.

But Viraj Patel, head of foreign exchange at the Dutch bank, insists that parity with the euro is not on the horizon, unless the UK suffers “a nightmare Brexit scenario” with a “complete breakdown” of negotiations.

“We do think the growing consensus within Theresa May’s cabinet over a transitional arrangement means that the tail risks of a cliff-edge Brexit are diminishing,” he said, adding that progress towards a transition deal was also likely to boost the pound.

ING also argue that the pound is “extremely undervalued” at present – with euro-sterling 20 per cent higher than it should be, and also note that parity with the euro would not be “in the economic interests” of the Bank of England, given its contribution to higher inflation and squeezed household incomes.