Sell the Pound, buy the Euro: Morgan Stanley

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- Pound a sell says Wall Street bank

- Fourth withdrawal bill vote to see 'no deal' odds rise

- Year-end forecasts imply orderly Brexit

The Pound-to-Euro exchange rate is seen stabilising at 1.14 this week following an uninterrupted run of 11 days of consecutive losses. 

However, any newfound poise might not last for long, according to analysts at Morgan Stanley, who're are telling clients to bet on further losses during the weeks ahead.

According to the Wall Street bank, the exchange rate will likely decline further in the weeks ahead as markets price-in a fourth failure by PM May to get the EU withdrawal agreement through parliament, which would amplify market fears of a possible 'no deal' Brexit on October 31.

Pound Sterling is still up 2.4% against the Euro this year but it fell to a year-to-date low against the Dollar last week and has now ceded its crown as the best performing G10 currency for 2019 to the Canadian Dollar.

A strong polling performance for The Brexit Party put Sterling on its back foot last week but losses accelerated after opposition leader Jeremy Corbyn withdrew from cross-party talks aimed at agreeing a future relationship with the EU that could secure a parliamentary majority, sending the Pound-Euro rate -1.48% lower by Friday.

"Market perceptions that Conservative-Labour party talks have failed to show progress and the Government’s announced decision to bring the withdrawal agreement to a vote in June have weighed on the GBP," says Hans Redeker, Morgan's head FX strategy.

Indications that Prime MInister Theresa May could resign for office as early as June have also focussed minds on a new Brexit 'hawk' succeeding her.

Above: GBP's rolling one-week performance vs G10. Monday, 20 May. Source: Pound Sterling Live.

PM May intends to put her EU withdrawal agreement to a fourth and final vote in parliament on June 03, although this last roll of the dice is still widely expected to result in another rejection by MPs. 

The EU has said it won't renegotiate the withdrawal treaty so if parliamentary support for the pact looks beyond reach it's far from certain that the bloc would agree to a third request for an extension of the Article 50 negotiating period if one was made.

That means MPs could find themselves faced with a choice between revoking the Article 50 notification that set the ball rolling on the exit process, or pursuing a 'no deal' exit that would see the UK leave the EU then default to doing business with it on World Trade Organization (WTO) terms.

"The government’s intention to hold a vote on the agreement despite not reaching a cross-party understanding with the Labour party may decrease market expectations of the deal’s passage. Resulting uncertainty may continue to weigh on the GBP," says Redeker warns.

Above: Pound-to-Euro rate shown at daily intervals.

Some analysts have said that a 'no deal' exit could send the Pound-to-Euro rate toward parity, from 1.1392 to 1.0, and the Pound-to-Dollar rate as low as 1.15. The Pound-Dollar pair was trading around 1.2721 Tuesday.

"GBP is the G10 currency where positioning is furthest away from the extreme shorts built before, so we think GBP is vulnerable to weakening," Redeker warns.

Redeker and the Morgan Stanley team are looking for a move lower in the GBP/EUR exchange rate all the way down to 1.0989, although the bank still forecasts the exchange rate will finish the year up at 1.19.

Redeker does not explicitly forecast a fourth failure of the withdrawal bill, but cites its passing as a risk to his bearish view on the outlook for the Pound-to-Euro rate.

Most MPs in parliament have always opposed an exit from the EU and many are vociferously against a WTO-style Brexit so when faced with a choice between the latter, a politically explosive decision to revoke Article 50 and supporting the PM, some of them could well choose to back the Prime Minister's agreement.

Parliamentay support for the EU withdrawal agreement would come as a shock to much of the market and given that it would mean a decisive end to the threat of a no deal Brexit, for the time being at least, it would also send the Pound rallying against the Euro and other rivals.

Above: Pound-to-Euro rate shown at weekly intervals.

Morgan Stanley's view that Sterling will end 2019 stronger implies a belief that the UK will ultimately avoid a WTO exit but that trading in British exchange rates could be very volatile over the coming months. 

There could be merit in that view because even if the withdrawal agreement does make it through parliament the Prime Minister will  remain under pressure to honour her pledge to step down after the first stage of the exit process is complete.

The next UK Prime Minister is widely expected to be a Brexit supporter and they'll be inheriting the government at a time when public attitudes to the governing Conservative Party are increasingly hostile and as the opposition Labour Party guns for a general election.

Furthermore, The Brexit Party has just sprun from the political ether to claim 1st place in polls of voting intentions for the EU parliament election and some general election polls even show it commanding more support than the governing Conservative Party. 

This risks creating an atmosphere in which in which circumstances pressure a new Prime Minister to tear up the withdrawal deal, or in a scenario where it has failed to clear palriament on the fourth asking - a "Brexit at any cost" strategy.

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