According to investment bank Morgan Stanley, the euro is expected to perform better than the pound this year due to a key economic indicator suggesting that the European continent will be able to sustain higher interest rates for a longer period.
The bank has recommended traders support the euro against the pound, as they believe that the UK’s reliance on foreign capital and its economic challenges, such as rising inflation and a tight labour market, will negatively affect the pound.
On the other hand, the eurozone seems to be more resilient to these challenges, according to Morgan Stanley.
The bank has also examined a trading indicator called the near-term forward spread, which shows the difference between the three-month interest rate and where investors anticipate it to be in 18 months’ time.
The spread of the eurozone does not indicate any signs of an inversion, which is a worrying trend observed in markets such as the US and New Zealand.
According to David Adams, the head of Group-of-10 FX strategy at Morgan Stanley, this indicates that the European Central Bank can continue to increase interest rates to combat inflation without being too concerned about the economic impact.
The investment bank had suggested backing the euro against the pound in November, and it predicts that the euro could be worth up to 93p this year, up from around 89p presently.
The euro has risen by 0.2pc against the pound today, and Mr Adams states that they are more pessimistic about the sterling, particularly compared to the euro and that the EUR/GBP’s upward movement is their top conviction trade.
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