Cable is headed to 1.24 - Morgan Stanley
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Morgan Stanley on the pound
Textbook-like GBP weakness. The easing measures announced by the BoE last week read like textbook tools to weaken sterling. Cutting interest rates by 25bps, indicating future cuts are likely and increasing the BoE's balance sheet by another GBP70trn via debt purchases (including GBP10trn corporate bonds) should drive GBP down. Unlike the BoJ or ECB, which have lost control over their real rates and yields, the BoE still has the capability to set real rates and yields near levels it regards as appropriate. The GBP yield curve offers room to maneuver as its rates are not at zero yet.
GBP depreciation best route to go. For July, the Pension Protection Fund reported a GBP408bn deficit for corporates included in the FTSE 350.Within two months, the pension fund deficit increased by GBP 314.8bn to GBP408bn, mainly driven by falling yields. In the absence of a quick rebound of gilt yields, the sharp rise of the deficit suggests the corporate sector would have to increase contributions or reduce its pension obligations.
Hence, a weak GBP does not only offer supply-side support but may also help boost UK inflation expectations, allowing nominal yields to increase while simultaneously allowing real yields to stay low. Front-loaded GBP weakness may help the UK minimize still substantial Brexit costs. We reiterate our GBPUSD 1.24 and EURGBP 0.94 target.
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