Home / Business / Pound to drop below the euro – weakened by threat of Labour victory, bank predicts | City & Business | Finance

Pound to drop below the euro – weakened by threat of Labour victory, bank predicts | City & Business | Finance

Hans W Redeker, a foreign exchange strategist with Morgan Grenfell, said that the pound would be coming under “profound selling pressure over the next few quarters”.

Morgan Grenfell, one of the world’s oldest merchant banks which is now owned by Deutsche Bank, has now joined with HSBC Holdings in predicting that the pound will drop below the euro in the near future.

Mr Redeker, while citing several reasons for the continued fall in value of the pound said that a key reason was the possibly of a Labour victory should a general election be called amid the current political uncertainty.

He suggested that any sort of transitional Brexit deal would immediately spark a rebellion amongst hard-core Brexiteers within the Cabinet which would very likely lead to the need to call a general election.

He said that a Labour victory “would put GBP under immediate selling pressure.”

He added: “The Labour Party’s agenda suggesting higher taxes on corporates and high income earners may weaken investment further, and may even lead to substantial capital outflows.

“Pound-denominated assets including housing may find it difficult to rally.” 

The bank also indicted the relatively weak strength of sterling.

Mr Redeker said: “The pound is likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks.”

He suggested that the current levels of consumer spending could not be maintained and a reduction in household spending was required which in turn would suck momentum from economic growth.

The bank also cited the strength of the euro which it said would “stay strong”.

Ongoing fiscal and banking integration within the eurozone countries would “allow for a higher valuation” and Mr Redeker noted that the euro, in his view, was the most “undervalued major currency in the G10”.

The bank forecast that the pound would be just above the euro by the end of the year at 1.02 and continue to fall to 0.98 by the end of March before seeing a recovery to 1.01 by mid-2018.

Lloyds Banks also cut its forecast for the pound agains the euro and the dollar on Friday and predicted that the exchange rate would be below 1.10 by the end of the year.

Lloyds said in the August edition of their International Financial Outlook: “Buoyant economic data in the euro area, the outcome of August’s MPC [the Bank of England’s Monetary Policy Committee] meeting and uncertainty related to Brexit have all contributed to the extension of the downtrend.” 

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