Morgan Stanley has slashed its sterling forecast for 2018 from $1.45 to $1.23 on Brexit negotiation concerns.
It has also turned more bullish on the euro, Reuters reports.
“The bull case (for sterling) has become less convincing, with the economy now showing signs of weakness.
“For sterling to do better, we need to see Brexit negotiations turning constructive, allowing markets to assume the British economy avoiding a cliff-edge Brexit,” currency analysts said in Morgan Stanley’s mid-year outlook.
The investment bank expects the pound to peak next year at $1.26 in Q1 before falling to $1.23 by the end of the year. In March it had predicted the UK currency would reach $1.45.
Article 50 was triggered at the end of March beginning the UK’s exit from the European Union.
Three weeks later Theresa May called a snap election, which saw sterling rise to $1.30 as markets perceived a stronger Conservative majority would give the prime minister more wiggle room within her party to negotiate a softer Brexit.
However, others have argued that an increase in support for Labour and the Liberal Democrats would signal a softer Brexit for the UK.
On the euro, Morgan Stanley now predicts it could rise as high as $1.19 early next year having previously suggested it would reach parity with the dollar this year.