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British Pound Heading for Parity Against the Euro

Currencies / British Pound Dec 11, 2008 - 06:20 AM GMT

By: Nadeem_Walayat

Currencies Best Financial Markets Analysis ArticleSterling continued its Crash of 2008 by falling to a new all time low against the Euro by trading below 1.14, which is just another marker enroute towards parity to the Euro as investors and speculators continue to adjust to the deteriorating fundamentals of record low interest rates, economic stagflation and an exploding pubic sector debt burden that is likely to cripple the British economy for many years AFTER the recession of 2009. Already some Bureau De changes are offering an exchange rate to the Euro of just 1.04.


Sterling has now crashed by more than 25% against the Euro and 30% against the U.S. Dollar as a consequence of Panic actions by the British Government and Bank of England to halt the economy from falling off the edge of the cliff as the May 2010 Election deadline approaches. This means goods in the shops are 25-30% cheaper for Europeans and Americans, this price disparity is not going to hold for much longer especially as my long range forecast is for sterling to trend down towards the £/$137.50 multi decade support level which may give temporary respite to the sterling bear market. A break below £/$137.50 would target parity to the US Dollar, which will mean a further loss of value of 35% in the value of all assets and 53% loss of value for the duration of the bear market to parity and likewise a large rise in the price of dollar imported commodities, goods and services and to a lesser degree from other countries, therefore highly inflationary.

£/$

Sterling is heavily oversold which implies short-term support for a rally over the next few weeks towards resistance at £/$1.55 from the current $147.

£ / Euro

In the short-term there is no support visible therefore Sterling is expected to continue its downtrend against the Euro despite rallying against the Dollar which thus implies dollar weakness.

Consumers to be Hit by Inflationary Price Hikes During 2009

Sterlings bearish trend confirms that goods in the shops will not remain cheap for long and thus shoppers should take the opportunity to buy during the stock sales of the next month or 2 as the price for filling shop stocks later during 2009 will be significantly higher, as already holiday makers venturing abroad are experiencing the consequences of the crash in sterling.

Gordon Brown Bankrupting Britain to Win the Next Election

The consequences of the systemic mismanagement of UK financial system is that the ever escalating measures taken to turn the economy around will prove highly costly to Britain for many years in terms of loss of real value of asset values and disposable incomes as the debt burden and liabilities soar to beyond £3.2 trillions. This also creates a great deal of uncertainty and difficulty in generating forecasts, because it is unknown to what extent the governments liabilities will actually grow to.

The recent analysis - Bankrupt Britain Trending Towards Hyper-Inflation? , highlighted the dangers that the banking sector posed to the UK economy with the risks that should a wholesale nationalisation of the banks be required then that would lift total liabilities to the British tax payer by £5 trillion, in comparison to the £500 billion of official public sector net debt outstanding at the end of 2007. This extra liability would be on top of the deficit spending and borrowing binge that the government announced in the emergency budget and thus risked bankrupting Britain which would be manifested in a collapse in the currency and thus the inability of Britain to service debt denominated in foreign currencies.

Will Britain Join the Euro?

Joining the euro is political dynamite for any party that would consider taking the momentous decision as the majority of the British public would under any circumstances be AGAINST the decision to do so. Therefore the only time a British government would actually contemplate joining the Euro would be in the face of an economic catastrophe, i.e. it would literally be the last throw of the dice in the face of impending bankruptcy and associated currency collapse and in that respect we are still some way off from that day. Still the risks of bankruptcy are real given the way official £600 billion of public sector net debt could rise to liabilities of more than £8 trillion as a consequence nationalising the whole banking system and several more years of ballooning deficit spending as the above graph illustrated.

UK Interest Rate Forecast

The race is on to keep cutting UK interest rates towards ZERO before inflation takes off as the interest rate forecast graph illustrates.

On a related note the UK housing market forecast is due for an imminent update, subscribe to our always free newsletter to get the scheduled analysis in your inbox on the day of publication.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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