Good news for UK holidaymakers on the continent: the pound has reached a seven-year high against the euro.
The effects of quantitative easing were felt in currency markets just a day after the cash injections started. The pound climbed above €1.40 against the euro for the first time since the finance crisis hit in 2007 Tuesday. The eurozone’s single currency also fell to a near 12-year low against the dollar, prompted not just by QE, but the expectation that the US might raise interest rates.
The euro is trading below 1.10 against the dollar prompting some observers to get excited about ‘dollar parity’, where $1 equals €1.
While the European Central Bank’s job is simply to stabilise the euro, President Mario Draghi is likely to be pleased. The shift will make European exports seem cheaper in the market and imports like energy seem more expensive, leading to inflation. That combination – economic growth through exports and high inflation – has the power to kick start the European economy and stop a slide into a sustain period of deflation, where goods get cheaper and growth goes backwards.
But what does it mean for the UK and the pound?
1. Cheaper holidays
The pound will go 15% further on the continent than it did last year. Holidaymakers who would have received €590 for £500 will now get €700 to put towards their ice-cream budget.
2. Shopping for less
From shampoo to mayonnaise, European brands imported to the UK are likely to get cheaper – look out for bargains on names like Renault, Nestle, Hellman’s and Dove.
3. Threat of deflation
There are fears that cheaper imports could add to deflationary pressure – where bargain hunters hold off from buying goods in the hope that they will get cheaper still. UK inflation has already fallen to 0.3 per cent – the lowest level on record – as a result of the declining price of oil.
4. British businesses struggle abroad
A stronger pound hurts British exports by making them more expensive for foreigners to buy. The UK’s top exports include nuclear reactors, fuels and pharmaceutical products – companies in these sectors may find their costs increaseReuse content