The pound's rally struggles to continue as institutions like Morgan Stanley turn bearish on the outlook

Although the GBP has recently rebounded against the USD, its sustainability remains questionable. Morgan Stanley strategist David Adams and his team have downgraded their bullish outlook on the pound in their latest report, believing that even if the UK budget provides short-term positive signals, the rally will be difficult to sustain. As of press time, GBP/USD is at 1.3227, down 0.08%. Although it previously touched a monthly high of 1.3269, the rebound momentum is clearly lacking.

Three Main Reasons for the Lack of Upside Momentum in the Pound

Morgan Stanley pointed out that the fundamental reasons for the declining attractiveness of the GBP/USD are threefold: First, the correlation between the pound and the stock market has fallen to zero, and the traditional risk asset linkage effect has disappeared; second, there is a lack of positive catalysts domestically; third, the short-term boost from the budget will eventually fade. The strategists team stated that even though closing hedge positions related to the budget might bring a last wave of rebound opportunities, from a long-term perspective, there are few reasons left to hold long positions in GBP/USD.

Meanwhile, investment bank Jefferies also expects the pound’s rally to turn downward. Economist Modupe Adegbembo emphasized that the UK’s ongoing fiscal fragility makes more aggressive strategies more attractive, as the market continues to digest the pricing of fiscal mismanagement and structural imbalances.

Can the Central Bank’s Rate Cuts Reverse the Situation?

From a policy perspective, there is a slim chance for the Bank of England to fully cut interest rates. Morgan Stanley’s analysis suggests that an accommodative monetary policy can create more room for fiscal measures, and lower borrowing costs will directly stimulate household consumption and corporate investment growth. When the Bank of England’s rate-cutting cycle approaches its end, economic growth will become the key driver for the pound, rather than short-term arbitrage trades.

However, this outlook faces many uncertainties. Developments in the US presidential election and subsequent policy directions will directly influence the strength of the dollar, which in turn will have a chain reaction on the GBP/USD exchange rate. If the UK’s economic growth prospects improve, market pessimism may turn around; conversely, the pound could face deeper correction pressures.

Market Consensus: Short-term Weakness in the Pound Remains the Main Theme

Many investment banks have reached a consensus — the pound is unlikely to have sustained upside in the short term. Under the influence of global uncertainties such as the US election, the pound’s movement is increasingly dependent on the dollar’s strength or weakness. Investors should be cautious of rebound traps and pay attention to the evolution of UK economic data and central bank policies, as these will directly determine whether the pound can break free from current pressures.