The investment bank said that it expects GBP to come under renewed pressure as safe haven inflows from eurozone countries could be challenged by the prospect of further QE.
It also noted Governor of the Bank of England, Sir Mervyn King’s comments regarding GBP suggesting that the Bank could be putting emphasis on currency developments.
In his opening statement at the quarterly inflation report last week, Sir Mervyn clearly described the biggest risks to the recovery stemming from “the difficulties facing the euro area, our main trading partner”.
Morgan Stanley said that a policy response to the crisis would unlikely be limited to QE if conditions in Europe deteriorated materially.
Ian Stannard, economist at Morgan Stanley, said: “While the Governor of the Bank of England, Sir Mervyn King, has pointed out the benefits of a weaker GBP in the past, insofar as assisting with the rebalancing process, his comments at the press conference appear to put a renewed emphasis on currency developments.
“As well as assessing Sir Mervyn’s comments on GBP we continue to analyse GBP in the context of the prospect of further QE and safe haven flows from the eurozone. We have noted in our research that safe haven flows are sensitive to Bank of England policy and that previous rounds of QE have deterred safe haven flows and even triggered overseas investor outflows from the gilt market, putting GBP under pressure.
“Indeed, this was certainly the case following February’s announcement that the Bank was to extend QE, with an outflow from the gilt market by foreign investors in February and March.”
It is Morgan Stanley’s view that the Bank of England’s Inflation Report suggests that QE is still on the table, which could deter safe haven inflows from the eurozone once again, removing an important source of support for GBP.
