Morgan Stanley sees the pound falling to June 2010 lows

Morgan Stanley has forecast that the pound will weaken by five per cent to $1.48 in just three months, based on the prediction that Bank of England governor Mark Carney will keep interest rates low despite data suggesting the UK economy is improving.

The pound jumped to an eight week high yesterday after it was reported that retail sales jumped 3.0 per cent annually in the third warmest July on record.

Against the dollar, it made further gains as better-than-expected initial jobless claims in the US suggested unemployment would continue to fall and the Federal Reserve could announce a tapering off of its asset purchase programme imminently. It currently stands at around $1.56.

But Morgan Stanley strategists told clients in a note yesterday it will fall lower to $1.48 – a level not seen since June 2010.

This is actually a more conservative estimate than Morgan Stanley’s head of European foreign-exchange strategy made in March. As reported in City A.M., Stennard said he was concerned that the chancellor would increasingly rely on monetary stimulus to make up for fiscal tightening, which could drive the pound as low as $1.43.

Independent economist Shaun Richards thinks otherwise: