Morgan Stanley has ended its bullish recommendation on the British pound, noting that the currency may have exhausted its last positive short-term catalyst.

Strategists including David Adams wrote in a Thursday report that while the pound had room for a quick rebound following Wednesday's UK budget announcement, the rally would likely fade. They added that the appeal of GBP/USD has diminished as its correlation with equities has dropped to zero, while domestic positive drivers remain scarce.

"With the budget now behind us, we see scope for at best one final push higher in sterling from the unwinding of budget hedges," the strategists wrote. "But ultimately, there are few reasons left to hold long GBP/USD positions."

GBP/USD climbed above the 1.32 level on Wednesday as the budget signaled a more restrained government approach to borrowing, triggering a UK market rebound. On Thursday, the currency pair was on track for a sixth consecutive day of gains—its longest winning streak since early August.

Morgan Stanley noted that over the longer term, substantial Bank of England rate cuts could help mitigate headwinds for the pound, as policy easing may create more fiscal space. The bank added that lower borrowing costs could also boost household consumption and business activity.

"Perhaps as we near the end of the BoE's cutting cycle, growth could replace carry as sterling's key currency catalyst," the strategists wrote. "If rate cuts help stimulate growth prospects, sentiment that might otherwise be negative for GBP could have significant room to shift."

Similarly, Jefferies expects the pound's rally to be short-lived, seeing further downside potential. The bank's economist Modupe Adegbembo wrote in a report:

"Looking ahead, we believe persistent fiscal vulnerabilities make yield curve steepening trades attractive as markets continue pricing risks of fiscal slippage and structural imbalances."