Morgan Stanley has urged forex traders to sell the pound against the euro this week after forecasting further falls for GBP due to ongoing uncertainty across the British political landscape.
The investment bank’s call came at the start of the new working week and just hours before the release of lacklustre PMI data. Britain’s manufacturing sector plunged below the 50 threshold which divides expansion from contraction. The 49.4 reading is the lowest since the EU referendum in 2016.
The slump supports Morgan Stanley’s theory that the UK’s economic prospects will be dampened for the foreseeable future and the Bank of England will be prevented from tightening monetary policy. The bank also recommended a 1.0989 GBP/EUR move.
The US dollar fell to its lowest level against the Japanese yen since January on Monday on the prospect of President Donald Trump widening his trade tariff net to countries beyond China.
Last week’s threat to implement 5% tariffs on Mexican imports has been a signal for the best forex brokers to move away from US stocks and focus on less risky assets such as the yen and franc.
TD Securities Global Head of Foreign Exchange Strategy Mark McCormick noted that trade tensions had forced them to adopt a “sell-on rally posture with dollar/yen”.
He added: “Though we think the recent warning shot towards Mexico could be resolved, the road ahead on the global trade front is likely to remain challenged until the G20 later this month.”
The yen climbed to 108.05 against the dollar just before 7PM GMT on Monday. The Swiss franc also strengthened, though Credit Agricole currency strategist said the currency’s recent resurgence is due in part to a “wave of risk aversion sweeping across markets”.
The first major US data release came on Monday but it wasn’t good news for the economy as the ISM Manufacturing PMI declined by 0.7 basis points to 52.1 in May. Analysts had expected a modest rise to 53.0.
Particularly concerning is a drop off in work backlogs contracted, which suggests order inflows are no longer capable of supporting full capacity.
The softer-than-anticipated manufacturing sector has also raised concerns that production levels may not pick up again until later in the year and strengthened sentiment that the Federal Reserve will introduce two interest rate cuts in 2019.
Lower rates can act as a deterrent in currency trading but MUFG analyst Lee Hardman said while the dollar has fallen against “safe haven” outlets like the yen, it continues to “grind higher” elsewhere.
The strength of the euro was also evident on Monday as it fought back against the franc, but investors are still not entirely sold on the single currency’s short to medium-term outlook following data showing a slump in manufacturing for a fourth consecutive month.
There were also fresh concerns about political stability in the Eurozone on Monday after the resignation of SPD Leader Andrea Nahles. Traders will remain focused on politics in the coming days as they look to make the right moves.