The Pound may drop to parity against the Euro

The euro will surge to parity versus the pound and reach its highest level in more than a year against the greenback as investors borrow low-cost funds in the U.K. and U.S. to buy higher-yielding assets, BNP Paribas SA said. The Bank of England and Federal Reserve are flooding their financial systems with cash to keep borrowing costs low on expectations their economies will recover slowly from recession. That will spur investors to use funds from the nations to buy securities in countries with higher interest rates, BNP Paribas said. “Sterling is likely to be the weakest currency in town followed by the U.S. dollar,” analysts led by Hans Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a note to clients yesterday. “The U.S. dollar has been used as a funding and a reserve currency simultaneously, suggesting the U.S. dollar will depreciate less than sterling.” The EUR/GBP is trading at 0.8910 as of 8:52am, London Time.

Sterling eased against the euro and dollar on Wednesday, remaining under pressure in the wake of Bank of England Governor Mervyn King's dovish comments the previous day. Data on the UK labour market on Wednesday were broadly in line with expectations but provided some respite for the pound as the figures were not as bad as some had feared. The number of people claiming jobless benefit rose by 24,000 in August, near market expectations, but fewer than 25,200 in July. "The pace of unemployment increases has slowed sharply and the recent trend has been consistent with an economy that is growing again, albeit moderately," said Nick Kounis, chief European economist at Fortis Bank. The GBP/USD is currently trading at 9:08am, London Time.

The Swiss central bank may hold its key interest rate near zero and keep measures in place to fight the risk of deflation even as the economy shows signs of emerging from recession. The Swiss National Bank, led by Jean-Pierre Roth, will leave the three-month Libor target at 0.25 percent at today’s quarterly monetary policy assessment, according to all 21 economists in a Bloomberg News survey. The SNB publishes the decision in Zurich at 2 p.m., when it will also release a policy statement.

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