In the bank’s latest FX Overview paper, it is argued that a combination of a stronger euro and a weakening pound will combine to make the euro more valuable than the pound for the first time in its history, and make it — in terms of pure value — the strongest major currency.
The euro has been on the up this year as investors have taken note of the improving fortunes of the bloc’s economy.
Countries like Spain and France have helped the bloc recover to its best levels since the eurozone debt crisis.
The forecasts suggest the euro will continue to strengthen and will move ‘beyond parity’ with the pound during the first three months of the year, hitting a peak of £1.02 before weakening a little as the year progresses.
By the end of 2018, €1 will be worth £0.91.
“We expect EUR to stay strong as pension funds and insurance companies (such as those in Switzerland and Japan) start to increase their net EUR currency exposure from historically low levels,” the team writes.
“GBP is likely to weaken in its own right, driven by weak economic performance, low real yields and increasing political risks.
“Last year, the British economy maintained its growth momentum even after the Brexit vote, but the structure of growth has changed. The household sector has increased spending, primarily funded by unsecured lending, which is unsustainable.
“A consolidation of the household balance sheet, coupled with negative real wage growth, may reduce consumption, which has been propping up growth so far. Brexit uncertainty may also weigh on business investment, which will weaken the already lackluster productivity growth outlook, suggesting real rates staying low.”
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