Why does the British Pound continue to face pressure? Multiple investment banks reveal the underlying reasons for the decline

The recent rebound momentum of the British Pound is fading. According to the latest Morgan Stanley report, the attractiveness of GBP/USD is weakening, and institutions are generally bearish on its subsequent performance. As of the latest quote, GBP/USD stands at 1.3227, down 0.08%. Although it previously rose to 1.3269, hitting a recent monthly high, the rally was not sustained.

One reason for the GBP decline: lack of fundamental support

Morgan Stanley strategist David Adams and his team pointed out that the short-term boost from the UK budget announcement is fading. More importantly, the correlation between the Pound and the stock market has dropped to zero, indicating that the traditional risk asset linkage logic no longer applies. Without positive local drivers, the rationale for holding long positions in the Pound is gradually diminishing.

The investment bank believes that, with the budget dust settling, the rebound is mainly an opportunity for hedge positions to unwind. However, from a long-term perspective, the support strength is limited.

Fiscal vulnerability becomes a key risk

Jefferies economist Modupe Adegbembo analyzed the reasons for the GBP decline from a fiscal perspective. The report pointed out that the ongoing fiscal fragility in the UK is a core risk priced into the market. Investors are generally concerned about fiscal mismanagement and structural imbalances, which put the Pound under pressure in the foreign exchange market.

Turning point in the central bank’s rate cut cycle

The Bank of England’s rate cut cycle is nearing its end, which also becomes an important variable influencing the Pound. Morgan Stanley believes that economic growth will gradually replace arbitrage trading as the main driver of GBP. If rate cuts can effectively boost economic growth prospects, market pessimism towards the Pound may turn around; otherwise, there will be little improvement. Lower borrowing costs theoretically will boost household consumption and corporate investment, but this will take time to materialize.

Market outlook: rebounds are unlikely to last

The consensus among multiple institutions is that any recent rise in the Pound is only temporary. To reverse the downward trend of the GBP, there needs to be substantial improvement in economic fundamentals or significant policy changes. Until then, the GBP/USD is likely to fluctuate under pressure.