Morgan Stanley “Increasingly Bearish”, Eye More Losses against Euro and Dollar

– The investment bank says GBP is facing further losses
– The impact of trade negotiations on the GBP is increasing
– Markets expect GBP volatility at the EU Council meeting

Pound Sterling

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The British pound has seen some welcome stability in recent days and is almost unchanged against the euro and 0.90% higher against the dollar over the weekend, but analysts from Wall Street Investment Bank Morgan Stanley They expect the UK currency to widen a multi-week decline against both currencies in the coming days and weeks.

In a briefing to customers, analyst Sheena Shah said that the Brexit trade negotiations are driving expectations for a weaker currency and that significant volatility is expected at a blistering EU meeting scheduled for mid-June.

Since the corona virus crisis hit financial markets in late March, the pound has been a whim of global markets. However, we believe the impact on sterling is gradually waning as investors are paying increasing attention to the issue of Brexit trade negotiations.

"Until a Brexit deal is closed, we expect the GBP rallies to be limited," said Shah.

Last week it was confirmed that negotiators were at a dead end, causing the sterling to fall sharply. The pound to euro exchange rate is currently 1.1115, the lowest since the end of March. The pound to dollar exchange rate is now at 1.2210, but given the broad fall in the dollar this week, sterling bulls will be disappointed that no further gains are expected.

"The UK government will have to decide whether to request an extension of the Brexit transition until the end of June. The market will increasingly focus on it in the coming weeks," said Shah. "Since the positioning of the foreign exchange market is neutral and only shows a slightly declining GBP, there is scope for short positions to be built, given the uncertainty in the coming weeks, when the EU Council meeting will take place in mid-June and the Brexit extension in late June consist."

The EU and the United Kingdom have a final round of negotiations before an EU Council meeting in mid-June, at which European leaders will take stock of the negotiations. The UK has until the end of June to request that negotiations be extended.

However, the UK has so far been firm in the view that negotiations do not have to go beyond the end of the year, which gives the feeling that both sides will default to the World Trade Organization's trade attitudes in 2021.

"The option markets offer a premium around the EU Council meeting. More extensive sentiment surveys indicate that the UK is less than 20% likely to have no expectation to request or receive an extension," said Shah.

GBPEUR forecasts

Understandably, the pound is expected to increasingly respond to trade flow news in June. Shah said they will pay particular attention to the UK government's comment ahead of the June 18-19 European Council summit prior to June 30 to request an extension of the transition period.

If no extension is agreed, Morgan Stanley predicts a weakening of the pound against the US dollar, the euro and the Norwegian krone. GBP / USD would fall below 1.20 near 1.15 next support and GBP / EUR could fall to the 1.0870 range.

Morgan Stanley economists still expect Britain to request a one-year extension, with a 40% probability assigned to this scenario.

Should an extension be agreed, the pound sterling is likely to strengthen against most of the competition, with the size of the rally relative to expectations before mid-June.

"The risk to our current bearish GBP assessment in June is that Prime Minister Johnson is proposing to request an extension much earlier than mid / late June. In this scenario, the GBP should recover," said Shah.

For Morgan Stanley, however, it's not just concern about the Brexit trade negotiations that has raised expectations of further sterling underperformance:

"We are bearish versus GBP due to growth prospects, easing BoE policy and impending Brexit uncertainty. GBP / USD has fallen below the key support area of ​​1.2270, which is now technically a room of 1, 20 opened, "says Shah.

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