Global investment bank Morgan Stanley has officially closed its bullish recommendation on the British pound, signaling that the currency may have exhausted its near-term positive catalysts. This development comes as the pound-dollar pair shows signs of losing momentum despite recent gains.
Budget Boost Fails to Sustain Momentum
According to strategists led by David Adams, while Wednesday's UK budget announcement provided a temporary boost to the pound, pushing it above $1.32, these gains are likely to fade quickly. The currency traded around $1.3263 during Thursday's Asia session, marking its sixth consecutive day of gains - the longest winning streak since early August.
The budget revealed that the UK government is adopting a more restrained approach to borrowing, which initially sparked market optimism. However, Morgan Stanley analysts believe this positive effect will be short-lived. "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 noted in their client communication.
Key Factors Weighing on the Pound
Several critical factors have diminished the pound's appeal in recent trading sessions. The currency's correlation to equity markets has fallen to zero, removing a significant support mechanism that previously drove its strength. Additionally, analysts point to a concerning lack of positive local drivers on the horizon that could sustain the pound's upward trajectory.
The investment bank isn't alone in its cautious outlook. Jefferies financial group also expects the pound's gains to be short-lived, anticipating further weakness ahead. Economist Modupe Adegbembo from Jefferies highlighted persistent fiscal vulnerabilities in a research note, stating: "Looking ahead, we believe persistent fiscal vulnerabilities make steepeners attractive, as markets continue to price in the risk of fiscal slippage and structural imbalances."
Long-Term Outlook and Potential Recovery
Despite the near-term challenges, Morgan Stanley sees potential for pound recovery through a different mechanism. The bank suggests that sufficient interest-rate cuts by the Bank of England could eventually help alleviate pound-negative factors. Policy easing might generate more fiscal space while lower borrowing costs could boost both household consumption and business investment.
"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 Morgan Stanley strategists wrote. They added that "should rate cuts help to stimulate the growth outlook, what is likely to remain GBP-negative market sentiment could have ample scope to shift."
This analysis is particularly relevant for Indian investors and businesses with exposure to GBP/INR fluctuations, as the pound's performance against the dollar typically influences its cross-currency movements with the Indian rupee.
