Morgan Stanley Upgrades Pound Sterling to Neutral

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Foreign exchange strategists at Morgan Stanley have upgraded their stance on the British Pound to neutral.

"We turn neutral on GBP," says a regular research briefing from the investment bank.

Morgan Stanley say although they expect Pound to continue trending lower against the Dollar from here, it looks set to outperform the Euro.

"We continue to expect GBP/USD to trend lower, driven chiefly by broad-based USD strength but, on the GBP leg, we think a lot of the bad news is now in the price," says the note.

"Low prospects of a near-term fiscal boost means UK growth would remain lacklustre for the rest of this year, limiting the BoE's ability to tighten materially. That said, this is not new news," says Morgan Stanley.

The call comes alongside ongoing U.S. Dollar strength that took it to 20-year highs against the Euro and its strongest against the Pound since March 2020.

But, the Pound to Euro exchange rate trades firmer back at 1.18 at the time of writing, having staged a recovery through the course of March. (Set your FX rate alert here).

According to analysts, fears of recession are no longer confined to just the UK economy and as growth expectations are reviewed elsewhere the Pound could be set for relief.

"The BoE was one of the first few G10 central banks to warn of the risk of a recession. Low UK growth expectations, the broader dollar and the risk backdrop remain key drivers of GBP/USD, and are all pointing to a weaker GBP," says Morgan Stanley.

In May the British Pound came under notable pressure after the Bank of England raised interest rates but warned the economy was due to slow sharply over coming months and that inflation might even peak at 10% later in the year.

"That said, this is not new news, and we think GBP could outperform some of its European peers, with EUR/GBP likely to stay weak from here," says Morgan Stanley.

The expectation for slowing UK growth is now well absorbed, meanwhile investors are currently making the same adjustments to their expectations concerning European and U.S. economic growth.

Elsewhere, strategists at the bank remain bearish EUR/USD and recommend shorts targeting 0.97.

"Safe haven demand for the USD should keep currencies broadly on the back foot, but EUR looks particularly vulnerable to weakness given a continued worsening in local data, rising risks of a 'gas shutoff' scenario after the Nordstream pipeline maintenance period ends on 21 July, and increased concerns that the ECB is behind the curve on inflation," says Morgan Stanley.

Expectations for a greater underperformance by EUR/USD relative to GBP/USD would automatically support the GBP/EUR cross rate.