GBP/EUR Exchange Rate Forecast to Hit 1.11 by Morgan Stanley Strategy Team

Strategists at Morgan Stanley have told clients that they continue to see value in selling the GBP to EUR conversion.

• Pound to Euro Exchange Rate today: 1 GBP = 1.1849 EUR
• Euro to Pound Sterling Exchange Rate today: 1 EUR = 0.8429 GBP

Pound Sterling will start August within familiar territory with markets unwilling to take major bets on the UK unit ahead of the all-important Bank of England policy decision due on 4th August.

There is a risk that an under-whelming response by the Bank could prompt a fresh bout of GBP strength, which we believe could take the pair back above the 1.20 barrier.

The GBP/EUR exchange rate has fallen from pre-referendum highs above 1.30 to the present 1.18-1.20 range witnessed in late July:

While downside momentum has certainly faded, it has not been abandoned.

Indeed, in all likelihood a convincing policy response from the Bank will be delivered, which should in turn devalue the British Pound as cutting rates and increasing quantitative easing devalues a currency on a unit basis.

Strategists at US investment bank Morgan Stanley agree saying a strong response is the odds-on scenario and have confirmed to clients that they see opportunity in continuing to sell the Pound against both the US Dollar and Euro.

Latest Pound/Euro Exchange Rates

	Live: 1.1445▲ + 0.02% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1056 - 1.1102
**Independent Specialist	1.1285 - 1.1331 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Why Morgan Stanley are Betting on a Weaker GBP and Stronger EUR

Strategists say they remain convinced that there should be sufficient
Bank of England MPC members to vote for at least a 25bp cut at the August 4th policy meeting.

“GBP is going to be responsive to further commentary coming out of the inflation report and will weaken if the BoE is open to further easing measures such as QE or even cutting rates below the perceived lower bound of 10bp,” says a strategy note from Morgan Stanley.

Monetary policy easing in both the UK and around the world should add further downside pressure for bond yields.

“UK bond yields being higher than those in the Eurozone, means that UK
bond yields have further to fall, supporting our long EURGBP trade,” says the note.

On a macro basis, weak data is expected from the UK in coming months while the Brexit outcome is negative for euro area growth, analysts see no immediate channel that is likely to drive EUR weakening.

The euro area runs a current account surplus, which would need to be recycled elsewhere to drive EUR weakness - “a tall order in an environment of declining risk appetite and returns.”

Another factor to watch for is any positive news on the Italian bank recapitalisation should add EUR support over coming weeks.

Even if the ECB cuts rates by 10bps in September, as Morgan Stanley’s economists expect, this is unlikely to do much for EUR given the bank balance sheet constraints and the already depressed level of yields.

“The risk to this trade is the BoE disappointing markets this week,” says the strategy note.

On 14th July Morgan Stanley sought to sell the GBP/EUR exchange rate at 1.1999.

The target for the trade is 1.11, while a stop loss is placed at 1.2270, in the event of the British Pound staging a notable recovery.

Sell GBP/USD

Selling GBP/USD is an alternative, or complimentary expression of GBP weakness that can be pursued, "for all the reasons mentioned below for the EURGBP trade," argue Morgan Stanley. "We see good risk-reward with selling GBPUSD on rallies too. The risk to this trade is that any broader USD weakness limits any downside in GBPUSD for now."

What the trade looks like: Limit Order (14-Jul-16) Enter: 1.3500; Target: 1.2500; Stop: 1.3800.

US Dollar "Looking South"

Perhaps, a contradictory element to Morgan Stanley's latest research is that they see the GBP/USD heading lower, as well as the broader US Dollar complex.

Of course a dollar basket of currencies can go lower, at the same times as the GBP/USD goes lower as the larger constituents of the basket (EUR/USD) heads higher.

Nevertheless, analyst Hans Redeker sees the Dollar moving lower on the back of altered Federal Reserve rate hike expectations. 

With markets seeing at least one pro-USD rate rise coming in 2016, Redeker argues "the Fed has little to gain by hiking rates early. Hence, we regard the recent rise in real US yields that has supported the 4% USD rally seen since May as unsustainable."

Morgan Stanley's long-held framework suggesting a combination of high global debt, capacity overhangs and resulting low returns on investment should keep deflationary pressures intact.

"The impact that this environment will have on financial markets via a flattened yield curve and
 ubdued inflation expectations should further support our weaker USD view, even though there have been recent upside surprises in US economic data," says Redeker. 

Market Headlines Ahead of the New Week

High street gloom spreads as shoppers shun Next: Next is braced for another fall in sales, in the latest sign of terrible trading conditions on the high street.

Mood darkens among Bosses: British companies are gloomier about their growth prospects than at any time since late 2012, according to a CBI survey published today.

O2 Chief dials up job at Verizon: The Boss of O2 is set to take a senior job with the telecoms giant Verizon in America.

Cobham set to jettison Boss: Cobham, the ailing aerospace company, is preparing to oust its Chief Executive as it attempts to recover from a disastrous year.

Careers advice can’t keep up with the jobs revolution: Few decisions matter more than choosing how to earn a living when you’re young. Traditionally, career advice is provided according to classic definitions of disciplines and occupations.

Carney lines up rescue package to steady economy after Brexit: The Bank of England is expected to unveil a stimulus package to boost the economy this week, including a rate cut and a possible round of money printing.

Beer giants rush to shore up megadeal: The maker of Budweiser is this weekend scrambling to find enough support among SAB Miller shareholders to ensure it can buy the FTSE 100 brewer for £79 billion.

HSBC profits fall 20% as bank woes deepen: HSBC is set to report a big slide in first-half profits this week as lenders continue to feel the pain in the aftermath of the Brexit vote.