Morgan Stanley said sterling prices in too little U.K. fiscal risk ahead of the October 28 Budget and recommended entering a short GBP/USD position at 1.3220. The bank's FX strategists, led by Bruna Skarica, set a target of 1.2850 and a stop of 1.3350, saying the trade hedges against an increase in GBP-negative risk premium. Morgan Stanley expects a low-key Budget that mildly delays consolidation, and estimates the Chancellor's headroom has narrowed to £8 billion from £24 billion in March, mainly because of higher gilt yields. To lift headroom back to £15 billion, the bank assumes £15 billion of revenue-raising measures, mostly tax increases, along with a permanent £8 billion rise in day-to-day spending. It sees the headline deficit at 3.7% of GDP next year, 0.7 percentage point higher than in March, with about 0.5 point due to debt-servicing costs, and expects an average £15 billion increase in cash requirements over the next three fiscal years. The bank's rates strategists see mild downside risks for gilts from the delayed consolidation and higher supply, expecting gross financing needs to rise by about £60 billion next year, while equity strategists see limited broad-market risk and view the U.K. as a bottom-up, sector-driven market.
Morgan StanleyMorgan Stanley is the source of the short-GBP trade call, but the news is about its FX recommendation, not a company-specific financial event.
Morgan Stanley recommends shorting GBP/USD ahead of the Budget, citing GBP-negative fiscal risk premium and higher gilt yields.
