The euro could soon be the strongest major currency on the planet. Morgan Stanley is predicting a stronger euro and a weakening pound – the trend that has dominated currency markets in 2017 – will combine to make the single currency more valuable than sterling for the first time.
In a recent note, the bank’s analysts forecast the euro would trade at £1.02 by the end of the first quarter for 2018. Right now, it’s hovering around £0.91. This rate is close to the level brought about by the “flash crash” incident of last October which, at the time, sent shockwaves through currency markets. Now it’s becoming normalised, as we head even deeper into sterling’s Brexit-related malaise.
Since the referendum last year, sterling’s value against the euro has shifted from 77p and 91p, damaging the competitiveness of Irish exports, denting UK tourist numbers, and eroding the profitability of companies that report in euro but generate revenue in the UK.
It’s already wiped out several mushroom exporting operations here and promises to wreak havoc on other food producers, whose margins are traditionally slimmer than businesses in other sectors.
Parity and beyond represents unchartered waters and the toll it’s likely to exact is impossible to predict. The only real policy option is market diversification, which is a tall order for many business, which have been tied into the UK’s massive consumer market.
The natural home for diverted beef exports, Ireland’s single biggest food export, is mainland Europe, but already that market is saturated, while the Chinese market, where the growth potential is, has yet to be unlocked.
Of course, Morgan Stanley’s forecast is just a forecast and much can change in the UK’s Brexit flightpath. However, the reception of the UK government’s recent Brexit policy papers; the mood music surrounding the talks and the gradual weakening of UK consumer spending don’t bode well.
ECB policymakers, which are keen to peg back the euro so as to lift inflation, may reverse the tide somewhat, but the impact of a policy shift in Frankfurt is more likely to be felt on the euro/dollar exchange.