Morgan Stanley has slashed its long-term sterling forecast, ditching its out-of-consensus call made in March that the UK currency would reach $1.45 by the end of next year.

The pound's rise to around $1.30 after Prime Minister Theresa May in April called a general election has reduced its undervaluation and the scale of market bets on further weakness, currency analysts at the US investment bank said in their mid-year outlook.

“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,” they said in the report published late on Sunday.

They now expect the pound's peak next year to be $1.26 in the first quarter, slipping to $1.23 by the end of the year. In March, when sterling was in the low $1.20s, they predicted that sterling would rise as high as $1.45 by the end of 2018.

They also turned much more bullish on the euro, ditching their call for a break below parity with the dollar later this year and now predicting a rise as high as $1.19 early next year.