Morgan Stanley remains bearish on GBP and now sees ‘Brexit discount’ fully in play.
“Rising risk sentiment is not going to help GBP for now, as markets increase their probabilities for a Brexit,” MS argues.
Monitoring the GBP Brexit discount.
“Between now and the June 23rd EU EU referendum referendum, we think GBP is going to trade at a discount to where interest rate or equity markets would suggest. Boris Johnson, one of the UK’s most popular politicians, campaigning to leave the EU will provide a boost for that side, keeping GBP weak. Going beyond a day, the polls will become increasingly important for GBP. Note that telephone polls have ‘Remain in the EU’ taking the lead, while internet polls suggest the opposite with the ‘Leave the EU’ in the lead,” MS adds.
“We expect GBP to trade lower going into the referendum in June, our bear case for GBPUSD is 1.30 for year-end,” MS projects.
“We think the FX trade with the better risk/reward, however, is to be short EURUSD as a Brexit may make markets question the whole European project,” MS advises.
In its strategic portfolio, MS maintains a short EUR/USD position from 1.1360, with a revised profit-stop at 1.1210, and a target at 1.07.
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