Sterling was pushed to a 6-1/2 year low against the dollar on Tuesday and hovered close to record troughs against the euro, keeping parity with the single currency in sight.
A deteriorating economy and the prospect of more aggressive interest rate cuts has hobbled the pound, with thin trading conditions helping to exaggerate moves as the year draws to a close. Market participants view it as only a matter of time before sterling breaches parity against the euro after the single currency surged to a record high of 98 pence on Monday, according to Reuters data.
“People see the opportunity to test parity in these thin trading conditions,” State Street foreign exchange strategist Lee Ferridge said. At 9:18 a.m., the pound was steady against the dollar at $1.4497, having earlier hit a session low of $1.4385, its weakest since April 2002. The euro jumped 1.2% to 97.60 pence to trade just a touch below Monday’s high.
Investors are increasingly worried about the state of public finances, which will limit room for further fiscal stimulus to shore up a flagging economy. “The deteriorating fiscal situation is becoming a major worry for the UK and this leaves the pound vulnerable,” State Street’s Ferridge said.
The Bank of England has slashed interest rates by 300 basis points since October to 2% in an attempt to shore up the economy, leaving them half a percentage point lower than in the euro zone, with more cuts expected in the new year.
The allure of a yield advantage for the single currency over the UK provides further reason to buy the euro against sterling, and although some market commentators have said the pound looks oversold its relentless falls show little sign of abating. “We do seem to be waiting rather imminently for that big test on euro/sterling and recent price behavior gives little reason to believe that parity won’t be found in the near term,” CMC Markets analyst James Hughes said in a note to clients. (Reuters)