GBP/USD reaches new highs for the near month, but Morgan Stanley warns that concerns remain

GBP/USD has recently performed remarkably well. On Wednesday, UK Chancellor Rachel Reeves announced the Autumn Budget, which received a warm market response, pushing the pound up 120 points to 1.3244, a nearly one-month high. Simultaneously, UK equities and bonds also gained—FTSE 100 rose 0.85%, and the 10-year government bond yield fell to 4.42%. This rally has now extended for five consecutive trading days, prompting many investors to speculate whether the turning point for GBP/USD has already arrived.

**The Budget lays the groundwork for future policy shifts**

The core focus of the UK Autumn Budget is on a sustainable fiscal framework. By increasing tax revenue estimates by an additional £26 billion, fiscal buffers have doubled to £22 billion, surpassing market expectations. Measures include extending income tax freezes, raising deposit interest tax rates, levying additional municipal taxes on properties over £2 million, and increasing online gambling taxes. Prudent fiscal management paves the way for future rate cuts—UK inflation in October fell to 3.6%, gradually opening space for central bank policy. The market generally expects the Bank of England to gradually lower interest rates in the coming months.

**Weak economic growth remains a major concern**

However, underlying economic difficulties behind the budget cannot be ignored. The UK faces multiple challenges: sluggish growth, sticky inflation, insufficient investment, and stagnant productivity. The latest forecast from the Office for Budget Responsibility indicates that growth expectations beyond 2026 have been downgraded, and inflation may only return to the 2% target before 2027. The potential output growth rate is only 1.0%, reflecting significant shortcomings in capital investment, technological innovation, and labor productivity. This suggests that the benefits of the budget are limited by a clear ceiling.

**Morgan Stanley adopts a cautious stance on GBP outlook**

Although GBP/USD has seen continuous gains, Morgan Stanley remains cautious. The bank believes this rally may be merely "the last hurrah"—a short covering of the positive effects from the budget. Morgan Stanley assesses that GBP/USD has likely exhausted its last recent catalyst, leading to a recommendation to turn bearish on the pound. More importantly, the correlation between GBP/USD and the stock market has fallen to zero, and there are no domestic bullish factors in the short term, which dampens the currency’s appeal.

**Dollar depreciation provides short-term support**

It is worth noting that the strength of GBP/USD is largely due to the dollar’s weakness. Market expectations for a 25 basis point rate cut by the Federal Reserve in December have risen to 85%, with another three rate cuts expected by the end of next year. If the Fed indeed implements significant rate cuts next year, dollar downside pressure will continue, and GBP/USD could maintain its strength. However, this support is passive and not driven by the pound’s fundamentals.

**Technical outlook: watch the key zone 1.3200-1.3240**

The daily chart shows GBP/USD breaking through the 1.3200 level decisively and rising for five consecutive days, with the AO indicator reflecting increasing upward momentum. If GBP/USD can stabilize in the 1.3200-1.3240 range, further rebounds toward the 1.3400 resistance level are possible. While technical analysis does not rule out a mid-term reversal in GBP/USD, caution is advised at high levels, and traders should watch for divergences between fundamentals and technical signals.