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Euro Poised to Break Higher, British Pound Strength to Wane: Morgan Stanley

European economic growth make the Euro an attractive currency

Sell any Pound Sterling strength suggest strategists with Morgan Stanley who expect the Euro to continue its march higher thanks to the Eurozone's attractive economic growth profile.

At the start of the new week the Pound is seen as being under notable pressure against the Euro with 1 GBP now buying 1.3380 EUR on the inter-bank market. The exchange rate opened the day at 1.1376.

In fact Euro strength is the theme to respect at present as the single-currency is up against all major G10 competitors, not only on December 4 but over the course of the past month.

And we can report that more strength can be expected with analysts at global investment bank Morgan Stanley saying the Euro "is poised to break higher, even if the ECB may not be rushed to tighten policy."

Morgan Stanley say the Eurozone's economic growth simply cannot be ignored and it is driving investment returns higher, this is attracting inflows from all shades of investor types.

Furthermore, signs of progress in forming a coalition government in Germany might provide and additional near-term push for the currency.

"Germany's Chancellor Merkel attempting to renew the "Grand Coalition" with the SPD may lead to more fiscal expansion in Germany and make it more supportive of pro-integrative European reforms. We expect EUR to outperform the G10," says Hans W. Redeker, Strategist with Morgan Stanley.

Pound Sterling Strength to Wane

By contrast, the Pound is forecast to underperform in December, and beyond.

Recall, the Pound was the best performing major currency for the month of November with a sizeable push coming towards the end of the month when signs of progress in Brexit negotiations became apparent.

The Pound is widely held to be undervalued relative to the fundamental economic backdrop owing to uncertainty related to Brexit and any signs of that uncertainty clearing are likely to aid the Pound.

Signs of progress on issues concerning the financial settlement, Irish border and citizen rights have lead to suggestions that the E.U. will agree to talk trade in early 2017 is a good example of such fog clearing.

Yet, "against this backdrop, risk/reward favours selling GBP on rallies, in our view," says Redeker who believes the U.K. economy is heading for a sustained slow-down in activity.

Redeker believes U.K. consumers are to struggle as their pay-packets are eroded by inflation which will negatively impact consumer confidence and spending

"Within a year, the UK’s relative performance has weakened, from having been a G10 growth leader," says Redeker.

Morgan Stanley are amongst the more bearish analysts when it comes to Sterling; indeed heading into November the investment bank believed the Pound would fall below parity against the Euro.

However, in a year-ahead publication of financial forecasts the investment bank walked away from the sub-parity forecast and announced upgrades to their GBP targets for 2018.

Analysts at the US investment bank say Pound Sterling will now avoid falling below parity with the Euro in the New Year as had been their view until recently, upgrades to their Pound-to-Dollar exchange rate forecasts have also been issued suggesting the floor on potential Sterling downside has been lifted across the board.

But it remains the view that the Pound is still likely to see significant downside during the months ahead.

“Beyond balance sheet vulnerabilities, GBP will likely be weighed down by the consequences of Brexit on the political and economic outlook,” says Hans Redeker, head of foreign exchange strategy at Morgan Stanley.

Forecasts for the Pound

Previously Morgan Stanley had forecast GBP/EUR to be at 0.98 by the time March 2018 came about.

For the end of 2018, Redeker and the Morgan Stanley team forecast the EUR/GBP rate to trade at 0.9400, down modestly from its first quarter level.

This implies a Pound-to-Euro rate of 1.0669, which is still a substantial distance below the current market price.

The Pound-to-Dollar exchange rate is forecast at 1.25 by end-March 2018, up from a forecast of 1.23 previously, 1.30 by mid-year, up from 1.23 previously and 1.24 by year-end.

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