Morgan Stanley Bets Against Pound Ahead of U.K. Budget

Morgan Stanley has taken a bearish stance on the British pound ahead of the U.K. budget announcement on October 28. The bank’s foreign exchange strategists, led by Bruna Skarica, recommend entering a short position at 1.3220, with a target of 1.2850 and a stop loss at 1.3350. They argue that the pound does not fully reflect the fiscal risks associated with the upcoming budget, which they describe as a hedge against an increase in GBP-negative risk premium.

The bank anticipates a relatively subdued budget, with only mild delays in fiscal consolidation. Strategists estimate that the Chancellor’s fiscal headroom has shrunk to £8 billion from £24 billion in March, primarily due to higher debt-servicing costs. To restore headroom to £15 billion, Morgan Stanley predicts £15 billion in revenue-raising measures, mostly through tax hikes, along with a permanent £8 billion rise in day-to-day spending.

Consequently, Morgan Stanley forecasts the headline deficit to reach 3.7% of GDP next year, up 0.7 percentage points from March, with about 0.5 points attributed to debt-servicing costs. The bank also expects a £15 billion increase in cash requirements over the next three fiscal years, though in-year needs are likely to see only modest changes.

Major fiscal decisions are expected to be postponed until next year’s Spending Review, which will address defense spending and prevent real-terms cuts in unprotected departments. Morgan Stanley notes that risks to the budget are skewed to the downside, with the most plausible upside scenario involving more aggressive action on inflation and spending freezes. The bank’s rates strategists see mild downside risks for gilts due to delayed consolidation and higher supply, while equity strategists view the U.K. market as sector-driven rather than driven by domestic macro factors.