EUR/GBP: Morgan Stanley's forecast for this week (8 Aug. 2016)

Morgan Stanley shares its forex forecasts of the euro and the pound for this current week.

EUR: Supported by the weak USD. Bullish view.

The EUR appreciated in the last week due to the overall weakening of the USD, and this should continue. While US real rates decline, real EUR rates. In view of the current debate on the effectiveness of the policy of negative central bank rates, nominal rates could also further push real rates up and support the EUR. Our preferred position to express our bullish EUR view is buying the EUR/GBP.

GBP: Immediate weakness. Bearish view.

The BoE acted Thursday with an easing package including a 25-point rate cut, more QE, corporate bond purchases and the Term Funding Scheme. Perhaps even more important than the easing itself, MPC members plan to further cut interest rates. This aggressive approach is likely to cause additional decline in the GBP and support our target at 1.24 for Q3 on the GBP/USD. The BoE seems to welcome the fall in the GBP despite the possibility that foreign exchange effects are pushing inflation above the target. If we observe a large fiscal response or if growth does not deteriorate as expected, then we could reconsider our bearish outlook for the short term.