UK holidaymakers may be wincing at the weakness of the pound as it hits yet more record lows against the euro, but experts today warned there may be worse to come for stricken sterling. The pound is now heading towards parity for the euro as its strength plunges, bringing back painful memories of the currency's troubles when it made its ungainly exit from the exchange rate mechanism in 1992.
Sterling has dropped 13% against the euro in the past two months as the Bank of England has slashed interest rates in unprecedented moves to stave off a deep and prolonged recession. However the Bank's actions may soon be vindicated as its European counterpart is forced to bring rates down in line with the worsening economic outlook.
The story is more about the euro being overvalued than about long-term weakness of the pound. We need to take this pain in the short-term, as we are cutting interest rates and the currency will reflect that. The European Central Bank has been reluctant to cut interest rates, but I think their monetary policy is wrong and that the euro will be sold aggressively in 2009. The pound could hit as low as 90 cents against the euro, but will rebound from mid-2009 onwards, recovering to 1.20 euros or more next year.
Report by Currencies Direct.
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