Morgan Stanley has no love for the pound
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From analysts at Morgan Stanley:
Central bank dovishness will likely keep the carry trade well-supported. Following comments by the Fed's Powell warning that the US was at risk of being trapped in low growth, it was the BoE's McCafferty warning that the cash rate could be cut further closer to zero and quantitative easing could be stepped up...Unlike the ECB or BoJ, the Fed still has the tools to push real rates and yields towards desired levels. The ECB's and BoJ's domestic yield curves are 'exhausted' and offer little room for nominal yields to fall further, leaving markets exposed to an unwanted increase in real yields, which could happen should inflation expectations be hit again. Accordingly,real yield and rate differentials should work in favour of EUR and JPY.
Outstanding GBP weakness:
Accordingly, there are two themes currently occupying the markets. Within the low-yielding FX world it is the real yield differential theme, and elsewhere it is the carry theme. The combination of these two themes should keep USD generally offered. It is only GBP that does not fit into this framework, running its own bearish agenda. Better July BRC like-for-like sales - stripping out stores that have opened or closed - rose by 1.1% in the period July 3 to July 30 from the same period a year ago. In July 2015, they increased by 1.2%. Total sales rose by 1.9% compared with a 2.2% gain in July 2015, boosted by promotional activity and warm weather. This result is the strongest growth since the start of the year. Nonetheless, GBP has come under additional selling pressure as the BoE's McCafferty offered more easing steps.
EURGBP to fly:
Better UK domestic demand indications as suggested by the BRC will not help GBP a lot. The UK's 7% of GDP current account deficit requires inflows to balance the balance of payments. Declining relative investment return expectations make it more difficult for the UK to attract sufficient funds at current GBP levels. Meanwhile, GBP real rates and yields have become the least attractive among all currencies we cover. EURGBP has breached the 0.8520 resistance. A daily closing price above this level should see this currency pair accelerating, getting closer to a 0.92-94 target range.
MS maintains a short GBP/USD position and a long EUR/GBP position in its strategic portfolio.