One More "Leg Up" for the Pound?

The British Pound is stuck in familiar territory against the Euro and US Dollar, something that should extend for some while longer we are told.

Yes, the UK currency fell in the wake of Bank of England Governor Carney's warning that markets should not expect interest rates to rise too soon, but it still trades towards the bottom end of familiar ranges.

Strategists at Morgan Stanley say betting on a further rally in Pound Sterling looks “lucrative” at this stage.

However, the call is subject to highly debatable assumptions regarding the Bank of England which is a key driver of Sterling value at present.

Recall that higher interest rates tend to boost a currency’s value as global investors transfer capital in order to take advantage of the higher returns on offer.

For Morgan Stanley, the Bank of England appears to be turning increasingly “hawkish and less willing to look through rising inflation, exceeding their own forecasts released in May.”

As such foreign exchange strategists see “one more leg-up in GBP, towards 1.31/1.32.”

However, others believe that it is against the Euro where outperformance will be realised.

Technical strategists at UBS argue the Pound has absorbed as much political negativity as it can take for now and that there is a good chance it will appreciate.

“I feel on the political front a lot of negative to GBP is price by now and I see continued headline risk for calls for a soft Brexit which should help Sterling eventually grind back higher, my preference is to express this view through short EUR/GBP,” says a strategy note from UBS, released on June 19.

It Could Actually be Time to Bet Against the Pound

The call from Morgan Stanley comes just as other analysts are saying foreign exchange traders should be looking for a move in the other direction, which looks to be more viable at this stage.

Analyst Robin Winkler at Deutsche Bank has made selling GBP/USD a “trade of the week” citing British politics entering post-election paralysis with a severely weakened May government muddling through.

“We continue to see the risks skewed to a disruptive and highly negative outcome from Brexit negotiations, rather than towards the government adopting a softer Brexit approach,” says Winkler.

Coupled with a gloomy outlook for the UK economy as real incomes fall, Deutsche Bank remain bearish on Sterling.

They target a fall to 1.25, entry 1.2799 and a stop-loss at 1.2970.