British Pound to Dollar @ 1.15-1.20 on Brexit Warn Morgan Stanley

Brexit will see the GBP fall, but worryingly for sterling bulls, even an In vote won’t save pound to dollar exchange rate from the 1.20s.

• 65% chance UK votes to stay in the European Union
• Currency forecast to fall into 1.20's by end of 2017, regardless of vote outcome
• Worst case scenario is GBP to USD at 1.15

Morgan Stanley, the US investment bank, have given their forecast on sterling’s direction should the UK vote for Brexit in June.

The bank is the latest to add its voice to the negative crescendo coming out of the institutional analytics community.

The analysis will have had some part to play in heightened fears over what a UK exit from the European Union will have on the economic standing of the UK.

The fears have crystallised most evidently in pound sterling which has been in  decline since November 2015.

Brexit-inspired selling reached fever-pitch towards the end of February.

We have however seen a recovery through March but the net depreciation since November stands just below 10%.

“Perhaps it is boredom, perhaps it is the awful prospect of 100 day’s more mudslinging on both sides of the debate or perhaps it is just a reflection of sizeable short GBP positions having already been established, but the fact is that the British pound has not performed particularly badly over the last fortnight,” say N.A.B in a note to clients.

Despite the easing up of downside pressure on sterling, the move lower is by no means done and what we could be witnessing is a pause in the trend lower.

Expect the issue to simmer in the background but it could well boil over again should the Out campaign gain traction over coming weeks.

Where is the Bottom?

A key question being asked by those with an interest in sterling is just how low sterling can go on an Out vote?

As an example of how soft sterling would likely become, HSBC forecast a 15-20% decline in the GBP to USD conversion on the combination of an Out vote and a delay to Bank of England interest rate rises. 

Handelsbanken predict a fall in the exchange rate to 1.22.

Capital Economics see a 15% fall on Brexit, but argue, this is not necessarily a bad thing.

Morgan Stanley: British Pound is a Currency to Sell

Delivering their latest set of foreign exchange forecasts are Morgan Stanley who also warn of deep falls in the pound to dollar exchange rate on Brexit.

The base-case forecast is for the sterling to dollar rate to trade at 1.45 by the time of the June referendum and close the year at 1.32.

The base-case scenario does not anticipate the UK voting to leave Europe though with a 65% chance given to an In vote.

But, “should the UK vote for Brexit on June 23, we estimate GBP/USD could fall as low as 1.20, taking EUR with it,” say Morgan Stanley in a note to clients.

The exchange rate would head as low as 1.15 by the end of 2017 on the event of Brexit.

'Boris Shock' Has Faded, But Hedging Pressures to Begin in Earnest

Analysts expect the British pound will remain sensitive to Brexit risks but with the 'Boris shock' out of the market, they believe the next leg down in GBP will be driven by investors hedging UK exposure.

The 'Boris Shock' refers to the sudden slump in sterling witnessed in late February as the Mayor of London made it known he would be campaigning for the Leave camp.

Worryingly for sterling bulls this hedging behaviour still hasn't begun in earnest it is argued.

“GBP will remain sensitive to changes in the polls, gauging probabilities for a Brexit, but this will be of tactical importance, rather than determining the trend,” say Morgan Stanley.

1.25 in 2017, Even in the Event of an In Vote

It must be noted though that analysts at the US investment bank are forecasting a decline in the GBP regardless of Brexit-related concerns.

There are pretty steep declines in GBP/USD ahead even if the UK votes to stay in the European Union.

“Other concerns include a pro-cyclical fiscal policy, the important UK financial sector being challenged by globally low rates, increasing regulation pushing financial sector productivity lower, and a current account deficit fluctuating around 4%,” say Morgan Stanley.

In the eyes of analysts these factors will make it more difficult to fund Britain’s financial needs at current attractive levels, arguing for a lower GBP.

By the end of 2017 Morgan Stanley are forecasting 1.25.

That said, there is the chance for a notable move higher in the GBP to USD exchange rate in the event of an In vote prevailing.

“Our economists put a 65% probability on the UK voting to stay within the EU, so 2Q should see a rebound as markets reprice the selling that occurred as a tail risk for Brexit,” say Morgan Stanley.

But, expect gains to be short-lived as the growth outlook in the UK looks worse, without there even being Brexit worries.

Tightening fiscal policy (watch the budget this week), higher financial services volatility and the manufacturing sector showing signs of a slowdown globally will all weigh on GBP, argue Morgan Stanley.

“Market pricing for the BoE is currently so extreme that there are risks that if wage growth were to pick up significantly, the market repricing would cause GBP to rebound, but we expect that this rebound would be limited,” say Morgan Stanley.

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