MORGAN Stanley is betting that the pound will rally after the UK’s November budget to hit a decade-high next year.
The US bank recommends that investors take advantage of any dip before Chancellor Rachel Reeves lays out her fiscal plans on Nov 26, to load up on a long position. It expects the currency to climb from below US$1.35 now to US$1.45 by mid-2026 – a level last seen before 2016’s Brexit vote.
“Between budget fears, switch and carry, and the dollar weakness thesis, we’re happy to be buying sterling that others are selling into the budget,” David Adams, Morgan Stanley’s head of Group-of-10 currency strategy, said on the bank’s Cause and FX podcast.
Sterling is already up more than 7 per cent against a broadly weaker US dollar this year, but its gains have petered out since hitting a four-year high in early July. That’s partly because the greenback has stabilised and partly because of investor nerves about the UK’s fiscal troubles.
Adams’s position, which reflects his long-held bullish view on the pound, comes as a growing number of banks expect the pound to fall ahead of the budget. Most strategists see the pound only posting moderate gains to US$1.38 by the middle of next year, according to a Bloomberg FX poll.
Concerns about the UK’s ability to borrow have been bubbling as investors speculate whether Reeves will be able to plug a spending hole estimated at around £35 billion (S$60.8 billion). Recent reports that she will end a cap on family welfare payments have sharpened the focus on how such spending will be funded.
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Investors tend to add short positions in the pound in the weeks leading up to UK budgets, according to Adams. Since an unfunded spending plan triggered a sharp sell off in the pound and UK bonds three years ago, markets have become particularly nervous about the event.
“There seems to be a persistent fear that the admittedly precarious UK fiscal position is going to trigger another event like September 2022,” Adams said. “But more often than not, these fears aren’t realised. Sterling ultimately rallies and short positioning unwinds, and we think this time will be no different.”
Worries around burgeoning fiscal deficits have so far been more sharply reflected in bond markets around the world. The UK’s gilts have also taken a hit, with 30-year yields surging to their highest since 1998 last month.
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The FX options market is showing signs of growing negative sentiment on the pound around next month’s budget announcement, even as the overall bearish mood has lifted slightly.
“While we do agree with investors that the budget is a key risk, we think investors are ultimately compensated for taking the risk of holding long sterling positions into the budget,” Adams said.
