Morgan Stanley pours cold water! GBP/USD short-term rally may struggle to continue

GBP/USD has risen for five consecutive trading days, just breaking through the 1.3200 psychological level, with the latest quote at 1.3244, hitting a recent monthly high. However, Morgan Stanley has dampened this rally, believing that the upside potential for the pound is limited and that this wave of gains may be nearing its end. The bank pointed out that GBP/USD is likely to have already received its final positive catalyst, namely the closing operations related to the budget bill. Subsequently, the bank has ceased its bullish investment recommendation on the pound.

**UK Budget Sparks Short-Term Market Sentiment, but Growth Outlook Worries**

On Wednesday, UK Chancellor Rachel Reeves announced the Autumn Budget, which received a warm market response. The plan projects an increase of about £26 billion in tax revenue by the 2029/30 fiscal year through tax hikes, doubling fiscal buffers to £22 billion, far exceeding market expectations of £15 billion. The budget mainly includes extending the income tax freeze, raising deposit interest tax rates, imposing property taxes on luxury homes over £2 million, and increasing online gambling taxes.

Boosted by this budget, UK assets rose across the board that day—FTSE 100 up 0.85%, UK government bond prices increased, pushing the 10-year yield down from recent highs to 4.42%. In the forex market, GBP/USD surged 120 points in a single day.

However, it is important to note that while the budget highlights a sustainable fiscal framework, its scale is limited, and its impact on real economic growth is modest. The UK Office for Budget Responsibility’s latest forecasts reveal deeper concerns—growth expectations beyond 2026 have been revised downward, with potential output growth expectations lowered to 1.0%, reflecting stagnation in capital investment, technological innovation, and labor productivity in the UK.

**Expectations of Rate Cuts by the Central Bank Support the Pound, but Durability is Doubtful**

From a monetary policy perspective, the market generally interprets this budget as paving the way for future rate cuts. Ample fiscal buffers and tightening deficits provide conditions for the Bank of England to adopt easing policies later. The UK’s October inflation rate has fallen to 3.6%, reaching the comfort zone for policymakers. Although the timeline to return to the 2% target has been pushed back to 2027, rate cuts are still expected to begin within this year. In the short term, this expectation has supported the strength of the pound.

However, Morgan Stanley emphasizes that the correlation between GBP/USD and the stock market has fallen to zero, and there is a lack of short-term domestic positive drivers, leading to a significant decline in the currency pair’s investment attractiveness. Coupled with the recent weakness of the US dollar, market expectations for a 25 bps rate cut by the Federal Reserve in December have reached 85%, with three more cuts anticipated before the end of next year. This means that if the Fed implements substantial rate cuts, GBP/USD could still benefit from a short-term rally.

**Technical Outlook: 1.3200-1.3240 as a Key Pivot**

The daily chart shows GBP/USD breaking through the 1.3200 level, with five consecutive days of gains, and the Awesome Oscillator (AO) indicating increasing upward momentum. If the pair can hold above the 1.3200-1.3240 support zone, further rebound attempts toward 1.3400 resistance are possible. There is also a possibility that a medium-term turning point for GBP/USD has already emerged, but investors should be cautious of the catalyst exhaustion risk highlighted by Morgan Stanley.

Overall, while the UK budget temporarily boosted the pound’s sentiment, slowing economic growth and the Bank of England’s easing expectations make a sustained rally difficult. Investors should closely monitor Federal Reserve policy moves and UK economic data to carefully assess the ongoing upward momentum of GBP/USD.