Pound-to-Euro Exchange Rate Breaks Below 1.13, Could go Sub-1.10 says Major Wall Street Bank

Image © Pound Sterling Live, Al Jazeera

- Morgan Stanley targeting move below 1.10

- Investors demand a premium on Sterling in current political uncertainty

- Scotiabank say another Brexit delay on the cards

The Pound is expected to remain under pressure for the forseeable future with analysts at Wall Street bank Morgan Stanley saying they see further declines against the Euro as being likely as either a new elections or a new Brexit referendum will be required to break the deadlock in British politics.

The Pound-to-Euro exchange rate is quoted at 1.1307 at the start of the new week, but amidst enduring political uncertainty the pair fell below the 1.13 level ahead of the weekend ensuring the GBP/EUR exchange rate recorded a 4.0% decline for May.

This makes for the largest monthly drop against the Euro in two years and confirms a negative trend.

"We expect the GBP to retain a weak undertone as recent political developments suggest to us that another Brexit delay is likely if only because a new Prime Minister and the parliamentary recess will make it nearly impossible to achieve even a 'no deal' departure before the end of October. That will dampen economic prospects, prolong uncertainty and delay any chance of the Bank of England tightening monetary policy," says Shaun Osborne, a foreign exchange strategist with Scotiabank.

Enduring political uncertainty means foreign investors continue to demand a premium on Sterling. Underlining this uncertainty was an extraordinary poll out last Friday that showed perennial laggards the Liberal Democrats topping a YouGov poll on Westminster voting intentions.

In what has become a four-horse race at the top of British politics, the Liberal Democrats, Brexit Party, Labour Party and Conservative Party are all polling a few points off the 20% mark: The Lib Dems scored 24%, the Brexit Party 22%, Conservatives 19% and Labour 19%.

The data suggests were an election to be held anytime soon another unstable minority government would be installed.

Polls have become increasingly important as we beieve there is a good chance a General Election is called in coming months. A 'no deal' advocate is likely to win the Conservative leadership race, which will in turn trigger a vote of no-confidence in the Government, which will most likely be lost as 'remainer' Conservatives would likely vote against their own government rather than see it pursue a 'no deal'.

The new Prime Minister will have little choice but to dissolve parliament and call another vote. "We think that markets might be underprepared for the possibility of general elections being called ahead of the October Brexit deadline. As such, we think the risks for GBP remain to the downside," says Shahab Jalinoos, foreign exchange strategist with Credit Suisse.

And with no party suggesting they would command a majority there is simply little political certainty for markets to latch on to, and it should therefore come as little surprise that Sterling is in decline.

"Agreement on the way forward will likely require either new elections or a new Brexit referendum," says Hans Redeker, a foreign exchange strategist with Morgan Stanley. "Our economists believe the risks of both a hard Brexit and Remain have increased. The results of the European election demonstrated a divided electorate between these two outcomes."

Redeker says continuing uncertainty may continue to weigh on the British Pound but the Euro could be supported by a repatriation of investor capital into the Eurozone in the current bout of trade war-induced market anxiety.

As such strategists at Morgan Stanley are advocating traders sell the Pound against the Euro, targeting a move 1.0989.