Pound's Best-Ever Run of Quarterly Gains Versus Euro Is Over

  • Morgan Stanley sees sterling weakening to 75.85 pence per euro
  • Weak U.K. economy and risk of Brexit to weigh on sterling: MS

The pound was set to end its longest run of quarterly gains versus the euro since the inception of Europe’s shared currency and, according to Morgan Stanley, the slide is unlikely to end any time soon amid signs the U.K. economy is slowing.

Sterling headed for its first drop versus the euro in nine quarters and its worst performance versus the common currency since the period ended September 2010. The pound was set for a quarterly decline against the dollar. The U.K. currency has been weighed down by uncertainty on when the Bank of England will tighten policy, with money markets not pricing in any increase in interest rates until after November 2016. Sterling has struggled to regain its footing amid investor concern that the turmoil in emerging markets and slide in global equities will hurt Britain’s economy.

There’s further weakness in store for sterling against the euro, according to analysts at Morgan Stanley, led by Hans Redeker, the London-based head of global currency strategy.

“Euro-sterling has further upside potential as the U.K. economy shows increasing signs of slowing,” they wrote in a note dated Sept. 30. With May’s general election out of the way “a more realistic assessment of planned fiscal consolidation and its impact on an economy” would be clearer, they added.

They said the pair could reach 75.85 pence, a level last seen in February, and added that the risks of Britain leaving the European Union “have increased, which we feel are not adequately priced in GBP-denominated markets.”

The pound strengthened for the first time in seven days Wednesday, gaining 0.6 percent to 73.79 pence per euro as of 3:51 p.m. London time. That pared its decline since June 30 to 4 percent. Sterling touched 74.37 pence per euro on Tuesday, its weakest level since May 7, the day of the U.K. general election.

The U.K. currency was little changed at $1.5139. It has dropped 3.6 percent this quarter.

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