(Bloomberg) — Morgan Stanley has closed its bullish pound recommendation, noting the currency is likely to have seen its last near-term positive catalyst.
While there’s scope for a quick rally following the announcement of the UK budget on Wednesday, the gains are likely to fade, strategists including David Adams wrote in a note on Thursday. The pound-dollar pair’s appeal has taken a hit as its correlation to equity markets has fallen to zero and there’s a lack of positive local drivers on the horizon, they added.
“With the Budget now behind us, we think that there is perhaps at best one last hurrah for GBP – an unwind of Budget hedges – but ultimately the reasons to hold onto GBP/USD longs are too few and far between,” the strategists wrote.
The pound had climbed above $1.32 on Wednesday as UK markets rallied after the budget signaled that the government is taking a more restrained approach to borrowing. The currency traded at around $1.3263 in the Asia session on Thursday and is on track for a sixth straight day of gains — the longest run since early August.
Morgan Stanley said that in the longer term, sufficient interest-rate cuts by the Bank of England could help alleviate pound-negative factors as policy easing may generate more fiscal space. In addition, lower borrowing costs can give both household consumption and business a boost, it added.
“Perhaps as we approach the end of the BOE cutting cycle growth will emerge as a key currency catalyst for GBP as opposed to carry,” the strategists wrote. “Should rate cuts help to stimulate the growth outlook, what is likely to remain GBP-negative market sentiment could have ample scope to shift.”
Similarly, Jefferies expects the gains in the pound to be short-lived and sees scope for further weakness.
“Looking ahead, we believe persistent fiscal vulnerabilities make steepeners attractive, as markets continue to price in the risk of fiscal slippage and structural imbalances,” economist Modupe Adegbembo wrote in a note.
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