MORGAN STANLEY: The euro will be worth more than the pound by next year


Pound Euro
Tourist
binoculars offer users the chance to pay in Pounds or Euros in
the British overseas territory of Gibraltar, historically claimed
by Spain, April 20, 2017.

Reuters/Phil
Noble


  • Morgan Stanley says Sterling will sink below €1 by next
    year.
  • Surging Eurozone economy will buoy currency.
  • Brexit uncertainty to weaken pound.

LONDON — The euro will be worth more than Britain’s currency by
the end of the first quarter of 2018, analysts from Morgan
Stanley said in a client note circulated on Friday.

In the bank’s latest FX Overview paper, a team led by strategist
Hans W. Redeker argue that a combination of a stronger euro and a
weakening pound will combine to make the euro more valuable than
the pound for the first time in its history, and make it — in
terms of pure value — the strongest major currency on the planet.

The euro has been on a huge tear during 2017, particularly
against the dollar, as investors take note of the improving
fortunes of the bloc’s economy, which has seen growth recover to
its best levels since the eurozone debt crisis.

It will continue to strengthen and will move “beyond parity” with
the pound during the first three months of the year, hitting a
peak of £1.02 before weakening a little as the year progresses,
the team’s latest forecasts suggest.

By the end of 2018, €1 will be worth £0.91.

On the one hand, Morgan Stanley argues, the euro’s historic move
beyond parity with the pound will be driven by continually
increasing confidence in the eurozone economy, which will prompt
major currency buyers to add a greater allocation of the euro to
their portfolios.

“We expect EUR to stay strong as pension funds and insurance
companies (such as those in Switzerland and Japan) start to
increase their net EUR currency exposure from historically low
levels,” the team writes.

However, what will also drive the move is the weakness currently
apparent in the British economy and the
uncertainty surrounding Brexit negotiations,
both of which
will drive down the value of the pound.

“GBP is likely to weaken in its own right, driven by weak
economic performance, low real yields and increasing political
risks,” the team writes.

“Last year, the British economy maintained its growth momentum
even after the Brexit vote, but the structure of growth has
changed. The household sector has increased spending, primarily
funded by unsecured lending, which is unsustainable (Exhibit 11).

“A consolidation of the household balance sheet, coupled with
negative real wage growth, may reduce consumption, which has been
propping up growth so far (Exhibit 12). Brexit uncertainty may
also weigh on business investment, which will weaken the already
lackluster productivity growth outlook, suggesting real rates
staying low.”

Here are both exhibit’s mentioned by the researchers:



Screen Shot 2017 08 11 at 15.12.41

Morgan
Stanley

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