Pound Sterling at Risk of Being Oversold: Morgan Stanley

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GBP is at risk of undershooting its fair-value targets warn Morgan Stanley whose strategy team write:

Some of the UK’s most prominent open property funds stopping withdrawals to try to avoid fire-sale type of liquidations have put market attention on the 45% foreign participation within those funds.

It underlined the significance of foreign selling of GBP-denominated assets.

With foreign liquidation there is now a growing risk of the UK’s financial account dipping into the red which, coupled with the UK's substantial 7% of GDP current account deficit, could lead to an emerging market-like FX reaction.

GBP is at risk of undershooting.

However, as long as the GBP decline does not trigger additional UK asset price weakness and volatility elsewhere, local authorities should be fine with a lower GBP.

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Front-loaded GBP weakness could even be beneficial for the UK, allowing it to generate inflation expectations which, in conjunction with lower nominal bond yields, could channel real yields to low enough levels to support investment picking up.

The BoE's financial stability report clarified that any weakening of the UK’s financial conditions would see the BoE easing.

This approach is justified, given high private sector leverage ratios.