Why is the pound so low against the euro?

By Karen Hoggan
Business reporter

image source, Getty Images

The holiday season is in full swing.

And whether you prefer sun, sand and sangria or meze, Metaxa and monuments, it can't have escaped your notice that the whole getting-away-from-it-all thing is a lot more expensive at the moment.

At least, that is, if you're a Brit bound for the eurozone.

The pound is touching 10-month lows against the euro at the moment at 1.0981 euros.

And currency strategists at US investment bank Morgan Stanley are even forecasting that the euro could move "beyond parity" with the pound on the currency markets for the first time ever in early 2018.

The last time the rate was within even spitting distance of that was back in 2008, when it was languishing at about 1.0200 euros.

Of course, there have been well-publicised occasions, even in the the past year, when people have got less than one euro to the pound at some currency exchanges.

But if that barrier were breached on the wholesale markets, it would be a "hugely important psychological" event, one unheard-of in the currency's 18-year history.

Of course, every cloud, as they say: the weak pound has attracted huge numbers of tourists from the eurozone to the UK.

April saw a record 2.93 million eurozone visitors - up from 2.499 million in April of last year, according to the Office for National Statistics.

Political uncertainty

The pound has been buying fewer euros since it fell sharply on 24 June 2016, the day after the UK voted in a referendum to leave the European Union.

But other factors are also playing their part. So just what is driving the relationship between sterling and the euro at the moment?

image source, Getty Images

The first thing to say is that it is primarily about euro strength rather than pound weakness.

Simon Derrick, chief currency strategist at financial institution BNY Mellon, reckons there have been two key factors recently which have stoked the euro's strength.

The first was that earlier in the year, there was a lot of political uncertainty in the eurozone, not least about the outcome of the French presidential election, and that drove the euro lower.

The National Front, led by Marine Le Pen, wanted France to abandon the euro - a move which could have caused turmoil in the eurozone - and even the European Union as a whole.

However, when it became clear that Emmanuel Macron was likely to win, "a lot of the political concerns started to dissipate", says Mr Derrick.

"As political tensions eased, it made the currency look rather more attractive."

Supply and demand

Another "significant factor" boosting the euro is anticipation on the markets that the European Central Bank will start cutting back on its Quantitative Easing programme, says Mr Derrick.

This has seen it pumping 60bn euros a month into the eurozone economy, in an effort to bolster its performance.

Essentially, that has meant huge amounts of euros sloshing around the system, keeping the value of the euro down.

However, if that changes, then the pressure on the euro will be lifted.

It's a question of supply and demand.

"The market has this expectation that at some point between now and the end of the year, the ECB will say something about further reducing the QE programme and as a result, the euro's been going up," says Mr Derrick.

Not only because it will mean less money in the system, but also because it will be a sign that the ECB thinks the eurozone economy can manage without so much support.

'Stumbling blocks'

There's a flip side to the relationship, of course: what's happening to sterling.

Ahead of August's Bank of England Monetary Policy Committee meeting, some people had been wondering if there would be signs that more members of the committee were in favour of raising interest rates.

When it became clear that wasn't the case, people were disappointed. That put pressure on sterling, because lower interest rates make a currency less attractive to foreign investors, explains Mr Derrick.

In addition, forthcoming political events are causing uncertainty for the pound.

Mr Derrick points to "potential stumbling blocks along the way for sterling". He highlights the start of the next round of negotiations between the UK and the EU over Brexit, and the Conservative party conference, among other things.

However, he is unwilling to stick his neck out and predict whether and when the pound and euro will reach parity.

image source, Getty Images

He concedes it's "possible" the pound could reach 1.05 to 1.06 euros before the end of the year.

Take a look online at some of the currency exchanges. At the moment, travellers can get about 1.0600 to 1.0836 euros for their pound, depending on how much you're changing and who you're doing it with.

But if the predictions are correct that the exchange rate is going to get worse for Brits, then those deals might start to seem quite attractive.

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