Pound-euro parity arrives early for UK tourists

When UK businessman Paul Frampton bought the spending money for his family vacation to Tuscany this month, he was astonished to be charged almost a pound for each euro he purchased.

“I was flabbergasted,” said the media-company boss, who paid 97 pence per euro at London Stansted Airport and blamed work commitments for having to do the deal minutes before jumping on his flight. “Airport exchanges are renowned for poor rates, but this was tantamount to daylight robbery.”

Euro-sterling parity is a reality that wholesale traders, as well as Britons travelling abroad, are going to have to get used to as soon as next year if forecasts by HSBC and UBS are to be believed. A one-for-one exchange rate would be a first for the pound. And even with a 12 per cent slide since the Brexit vote, the UK currency is still some way from its all-time low of 98.03 pence per euro reached in the depths of the global financial crisis in 2008.

The European Union buys about half of Britain's goods and services, and the June 23rd decision to leave has hurt the pound by stirring concerns the nation will struggle to fund its record current-account deficit of 5.4 per cent of gross domestic product.There are already signs investment is being hit, with Vodafone Group among the companies considering moving their headquarters outside the country.

On the other hand, a weaker currency makes the UK’s exports more competitive – even as it hurts outbound tourists.

Cutting deficit

“Even before the referendum, it had become a question of, how does the current-account deficit decline?” said Themos Fiotakis, London-based co-head of currency and rates strategy at UBS, which is Switzerland’s largest bank and this month reiterated its prediction for the pound to fall to parity with the euro in 2017.

“The uncertainty resulting from the vote to leave is creating additional pressure.”The Bank of England’s response – which has included an interest-rate cut and expansion of the money supply to soften Brexit’s economic impact – has also hurt the UK currency. The pound fell on Friday, ending the week at about 86.6 pence per euro in London, as Prime Minister Theresa May’s team was said to be leaning toward the first part of 2017 as the best moment to trigger the start of formal EU exit talks.

More competitive

Vacationer Frampton, who also owns a property on the Spanish island of Ibiza and regularly transfers money there from the UK, bought his last-minute euros at a TTT Moneycorp counter at Stansted Airport. Moneycorpretail director Tracy Bownes said airport customers pay more because of higher operational costs.It was charging about 99.85 pence per euro on Friday at Stansted. Bownes said the London-based company doesn’t charge commission and that, at some outlets, as many as 50 per cent of its customers achieve more competitive rates by ordering online and collecting their cash at the airport.

Exchange rates at some money changers have already gone above a pound, with operators at Stansted and nearby London Luton Airport having charged travellers about 101 pence per euro, according to a survey published August 17th by Caxton FX. Travelex, which operates in 13 UK airports, told Bloomberg last week it charged customers at its branches at London’s Heathrow Airport as much as 98 pence for a euro.

Distant prospect

While euro-sterling parity may already have arrived for British tourists, in the wholesale market it would require a more than 13 per cent drop in the pound. Options prices imply only a 32 per cent chance of this happening within two years, while the median estimate in a Bloomberg strategist survey is for the UK currency to strengthen to 83 pence per euro by the end of 2017.

HSBC, Europe’s biggest bank, cut its sterling forecast on August 8th to predict parity with Europe’s single currency by the end of next year. It also sees the pound falling 16 per cent to $1.10, surpassing a three-decade low of $1.2798 reached in July.

“The parity level would make the UK more attractive to foreign investors,”said Daragh Maher, the New York-based head of US currency strategy at HSBC, who moved to New York in 2015 after 16 years in London. At the same time, a continued slide in sterling “would also make it more expensive for people to come and visit me”.

Bloomberg