Pound sinks against euro amid Bank warnings

The pound sank to levels not seen for five months against the euro today amid Bank of England warnings over the sustainability of the exchange rate.

Sterling dropped as low as 1.101 against the euro today, the lowest level since early April, while it also slipped to 1.6135 against the dollar.

In its quarterly economic bulletin, the Bank mulled the reasons for the pound's sharp depreciation last year and said foreign investors could be less willing to buy UK assets, damaging the pound's long-term prospects.

The Bank said the economic crisis, the UK's current account deficit and the country's reliance on the financial sector have played a part.

It also noted that the exchange rate may have "moved above its long-run sustainable level" in the years leading up to the crisis.

"It is also possible that sterling's depreciation may be part of a more prolonged process of rebalancing of the UK economy, generating a fall in the long-run sustainable real exchange rate, although it is again difficult to obtain direct evidence about this possibility," the report said.

Mark O'Sullivan, dealing director at Currencies Direct, said the pound could be heading back down towards parity with the European single currency.

"The horizon looks to be fairly bleak for the UK," he said.

Mr O'Sullivan said the start of the political season, with pledges across the parties for cuts in spending, had hit confidence in the UK currency.

Rumours over banks being forced to lend - including speculation over negative interest rates, which would penalise institutions for holding cash - had also taken their toll.

He said traders were looking to currencies that provided richer rewards like the Canadian and Australian dollars.

"Sterling is under performing any currency at the moment and it is difficult to see this side of the end of the year how it is going to stage a fight back," he said.

"It feels like it is set for fairly large moves lower because it is difficult to find any reason to buy sterling at the moment."

He added that while the currency was already falling, the Bank's report was having an effect.

The Bank's report said the UK had consistently run current account deficits averaging around 2% of economic output since the mid-1990s as UK businesses, households and government borrowed from abroad to fund consumption and investment.

"Provided the foreign investors were content to build up claims on the future earnings of UK residents in the form of financial assets, such an imbalance of domestic expenditure over savings was sustainable," the Bank said.

"But the financial crisis may have led overseas investors to reassess their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit."

The bank added that the "potentially more pronounced effect" of the crisis on the UK financial sector compared with other countries "could be perceived to have led to a permanent fall in UK households' and firms' income".

It said this could be one of the reasons why investors "might perceive that the financial crisis had prompted a fundamental shift in demand away from UK goods and services".

The report added that the Bank's unprecedented £175 billion quantitative easing policy - essentially printing money to buy assets and boost the money supply - could have had an effect.

Sterling would tend to depreciate if the policy caused investors to "rebalance" portfolios away from UK assets, it noted, but countered that the pound would rise if the scheme was seen as boosting the economic prospects for the country.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific
    In this the person to restore our trust in the banks?

    In this the person to restore our trust in the banks?

    Dame Colette Bowe - interview
    When do the creative juices dry up?

    When do the creative juices dry up?

    David Lodge thinks he knows
    The 'Cher moment' happening across fashion just now

    Fashion's Cher moment

    Ageing beauty will always be more classy than all that booty
    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

    Saving Private Brandt

    A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral