Morgan Stanley (MS) says the pound will weaken 5 percent to $1.48 in three months on bets Bank of England Governor Mark Carney will stress he’ll keep interest rates low even as data signal the economy is strengthening.
The pound’s advance to an eight-week high yesterday after retail sales in July rose more than economists forecast provides an opportunity to sell the currency, strategists led by London-based Hans Redeker said. The central bank is more open to additional stimulus than market prices suggest and may resume asset purchases that tend to weaken the pound, they said.
“The market is obsessed with the economic momentum, but there is a substantial output gap in the U.K., which will require several years of good economic performance to close,” Redeker, the head of global foreign-exchange strategy, said in a phone interview yesterday. “The Bank of England will make it clear pretty soon that it is focusing on the output gap.”
The pound was little changed at $1.5637 at 10:19 a.m. London time, after appreciating to $1.5652 yesterday, the strongest level since June 19.
Investors should sell at $1.5530, the strategists wrote in a note to clients, betting on a drop to $1.48, a level unseen since June 2010. Sterling fell to this year’s low of $1.4814 on July 9.
Signs that the U.K. economy is strengthening, with falling jobless claims and improving Purchasing Managers Data in July and the dissent by the Monetary Policy Committee’s Martin Weale against the new forward-guidance framework have fueled bets that the Bank of England will need to raise interest rates sooner than the central bank anticipates.
The U.K. benchmark interest rate has been at a record-low 0.5 percent since March 2009.
“Expectations for the economy have risen significantly over the past four weeks,” Redeker said. “Given the amount of positive surprises so far, it’s unlikely that further data will add to current expectations.”
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