Markets

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

The pound took another beating on the foreign-exchange market on Wednesday, dropping to its lowest level against the euro since 2009. Parity against the common currency beckons.

Poised for Parity?
The pound dropped to its lowest level since 2009 against the euro on Wednesday
Source: Bloomberg

The trigger for the latest leg lower was a purchasing managers' index survey showing manufacturing in the euro zone beat expectations in August, expanding from the prior month rather than declining as economists had anticipated.

Manufacturing PMIs
The euro zone is outpacing the U.K.
Source: IHS Markit via Bloomberg

While the next PMI survey for the U.K. isn't scheduled for release until Sept. 1, the Brexit-induced gap isn't likely to close any time soon.

Moreover, there's a key difference between the pound's current travails and what was happening on the market when it touched its record low against the euro at the end of 2008. This time, sterling is worth about $1.28 against the greenback, down from about $1.40 at the time of its nadir against the common currency.

Universally Weak
The pound is even weaker against the dollar than it was when it reached a record low versus the euro
Source: Bloomberg

That double whammy leaves the pound vulnerable to posting a new record low on a trade-weighted basis against the currencies of its biggest trading partners.

Revisiting Record Low?
The pound's value on a trade-weighted basis
Source: Bloomberg POUND index
Note: Index starts from Dec. 31, 2004 with value of 1,000. Index weights for 2017 are 41.2 percent euro, 36.4 percent dollar, remainder other currencies

There's a distinct possibility that sterling's weakness will surpass even the dark days of last year in the months after the U.K.'s shock decision to quit the European Union.

While that in theory should help British exporters, the textbooks say it will also boost inflation -- further crimping cash-strapped Brits at a time when wage growth is lackluster. For now at least, the pound remains trapped in a negative-feedback cycle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects data label showing today's low in first chart.)

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net