Sterling at 16-month high against euro as fear mounts

Sterling traded above €1.21 today (5 January) for the first time since September 2010 amid continued concerns over the EU sovereign debt crisis and its potential impact on eurozone stability.

Jason Gaywood, consultant at currency broker HiFX, warned that the unwillingness of European banks to lend to one another - despite the addition of €489bn in funding from the European Central Bank in December - has “renewed concern” about the “very real” prospects of a full and unruly default by Greece.

He said: “Such an event would likely cause a systemic collapse of the euro as the domino effect takes hold of the weaker economies such as Portugal, Ireland, Spain, Italy and potentially even France.”

Mr Gaywood claimed that market participants remain “sceptical” as to the future of the single currency.

He said: “Since July 2011 when the euro was trading as high as €1.1 against the pound, it has given up 11 cents or over 9 per cent of its value, making UK exports to the EU nearly 10 per cent more expensive in real terms.

“A similar weakening has seen the US dollar move 14 per cent against the euro.

“With little evidence of any tangible improvement in the situation, traders seem set to continue to punish European sovereign and commercial assets and threaten to weaken the unified currency further in the coming weeks.

Mr Gaywood said it was likely that the trend would continue, saying that a breach of €1.24 against sterling could “open up potential moves towards €1.3.”