The GBP rebound has a ceiling; why are multiple investment banks turning bearish

After a brief rally, the pound is once again under pressure. As of the latest quote, GBP/USD has fallen 0.08% to 1.3227, after touching a monthly high of 1.3269. Behind what appears to be a strong rebound, investment banks are ringing alarm bells.

**Rapid fading of the fiscal stimulus effect**

Morgan Stanley's strategists recently adjusted their stance, no longer optimistic about the pound. Their core logic is straightforward: although the UK budget announced on November 26 temporarily boosted the pound, this rally was already at its end. The support this budget could provide to the pound is limited to the "closing position" phase. Once this phase ends, the pound will lose its last upward momentum.

Morgan Stanley points out that the attractiveness of the pound against the dollar is declining. More painfully, the correlation between the pound and the stock market has dropped to zero, and there is a lack of positive driving factors domestically, meaning the pound has lost support from risk assets.

**Can the rate-cut cycle be a lifeline?**

In the long term, the Bank of England's rate-cut strategy might change the situation. Investment banks believe that sufficient rate cuts can create room for fiscal expansion, and lower borrowing costs will stimulate consumption and investment demand. The key question is: when the rate-cut cycle nears its end, whether economic growth can take over as the new driver for the pound. If rate cuts truly boost growth expectations, market sentiment towards the pound could reverse. But all of this depends on economic growth actually following through.

**Fiscal risks pose hidden dangers**

Other investment banks like Jefferies share similar views, believing that the pound's rally window is extremely limited. Economists point out that the UK's ongoing fiscal fragility is prompting the market to reprice, making steepening strategies (shorting long-term rates relative to short-term rates) more attractive. The underlying concern is very real: risks of fiscal out of control and structural imbalances remain, and markets are digesting these risks.

In short, this rebound in the pound is more like a "last gasp"; unless economic growth can significantly reverse expectations, the answer to whether the pound will rise again is likely no. The shift in investment banks' attitudes reflects that the pound is no longer the favorite among traders.