'Not Very Sterling': MS Sees GBP/USD Near Parity Before Year End After New Record Lows

© Reuters. 'Not Very Sterling': MS Sees GBP/USD Near Parity Before Year End After New Record Lows

By Senad Karaahmetovic

The British pound hit a fresh record low against the U.S. dollar in continued response to the U.K. government's announced tax cuts on Friday.

The GBP/USD slipped to $1.0357 overnight before recovering to trade near the $1.07 handle at 06:00 EST (10:00 GMT) in what has been an extremely volatile trading session. Today’s low marks a new record low after breaking the 1985 low.

On Friday, the U.K. Chancellor of the Exchequer Kwasi Kwarteng unveiled a huge tax-cutting package.

"I'm always calm. Markets move all the time. It's very important to keep calm and focus on the longer term strategy,” Mr. Kwarteng said today.

On the other hand, UK bond yields continued to surge as investors continued to ramp up bets on aggressive tightening by the Bank of England. According to Bloomberg, the market is now pricing in 175bps of BOE tightening by November and 400bps of hikes by September 2023. If this scenario materializes, it would push the bank rate to 6.25%, the highest since 1999.

In response to the most recent developments, as well as a projected upside for US interest rates, bond yields, and the dollar, a Morgan Stanley strategist cut price targets on both EUR/USD and GBP/USD.

“Our new forecast for GBPUSD to fall to 1.02 should support continued outperformance from large-cap UK equities at both the price and EPS level. Our new Dec-22 target of EURGBP at 0.91 suggests a further 5-10% outperformance of FTSE100 over SX5E and over FTSE250,” the strategist said in a client note.

The new forecast for EUR/USD calls for a drop to 0.93 by December 2022.

Similarly, a Goldman Sachs strategist says the market is concerned that the Bank of England failed to impose a more aggressive tone last week.

“Considering the size and breadth of the fiscal package, even a 75bp hike seems likely to leave the BoE behind the curve on taming inflation and well below market pricing which is now close to 100bp,” the strategist told the bank’s clients.

Along these lines, the strategist cut EUR/GBP forecasts to 92, 0.90, 0.88 in 3, 6, and 12 months (vs 0.85, 0.83, and 0.84 previously), respectively. He also downgraded GBP/USD forecasts for 3, 6, and 12 months ahead to 1.05, 1.08, and 1.19 (vs 1.14, 1.17, and 1.25 previously), respectively.