The following article was written by freelance writer Zak Goldberg.
It has been a rough year for the UK, with political upheavals and economic upsets seemingly unending. With inflation rising and many worried about the economic outlook for Britain, the pound has been steadily falling in value against the euro, now standing at 1.1376 (at time of writing).
In light of this, many people are now wondering whether the pound might reach parity with the euro. Here are some considerations.
Brexit
The referendum in June last year saw the pound sink to a 31 year low as the British public voted by a narrow margin to leave the European Union after 43 years as a member. This shows how unprepared the markets were for this unexpected result, the effects of which are still being felt today.
The pound has been stagnating ever since (bar a slightly stronger performance at the end of 2016), despite Brexit negotiations having barely started. As Brexit negotiations develop, the future economic picture will become clearer and this is likely to have some bearing on the pound’s value against the euro in the run up to the exit date.
Election Instability
The recent general election in Britain could also have a significant impact on the GBP/EUR rate. Theresa May’s gamble massively backfired as her governing Conservative Party failed to secure their desired majority, resulting in a hung parliament and a significantly weakened pound once again.
The chances of a softer Brexit, however, which many people believe would create more stability, are now much higher, given that May does not have her desired mandate. Now the process is likely to be far more delicate and collaborative, especially given that the strengthened Labour Opposition want to protect access to the European single market. This could halt the pound’s decent to parity, although it should be noted that the political landscape continues to be in unsettled waters.
Volatility
The volatility of the pound over the last year makes forecasting its trajectory difficult. Those trading forex using brokers like forex.com will have no doubt grown accustomed to the currency’s unpredictability, and this looks set to continue as decisions over the UK’s economic future are made over the next two years.
This relentless uncertainty leaves the markets open to far more volatility, and with the pound as low in value as it is, the chance of it falling to parity with the euro, even for a brief period, remains high.
Parity
Ultimately, the UK’s eventual exit from the EU could be the final tipping point for GBP/EUR, as there is a sense at the moment that the UK is bracing itself for the shock.
The economic predictions for a post Brexit UK have mostly remained gloomy, and since trade deals cannot be made with countries outside the EU until the UK exit, the economy could well go into freefall if negotiations are unsuccessful.
The pound has a very high chance of reaching parity with the euro. As the UK is in such an unprecedented position, it seems like the economy is facing an uphill struggle as negotiations continue in an incredibly uncertain climate.