Goldman Sachs says Negative Views on Pound Sterling Overdone, Can Recover against Euro
- Written by: Gary Howes
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Image © Adobe Stock
The outlook for the British Pound is not as poor as current investor sentiment would suggest, says a leading Wall Street investment bank.
Goldman Sachs sees some "positive steps" with regards to Sterling fundamentals of late and they anticipate the "recovery" of the Pound against the Euro to extend.
"The Sterling story has been anything but straightforward in recent months, but we think investors may have gotten overly negative on GBP," says Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, in a weekly foreign exchange briefing.
This call comes amidst short-term weakness in the UK currency thanks to a souring global investor sentiment linked to concerns over the spread of Omicron.
A domestic drag to the currency comes amidst heightened anxieties over rapidly rising cases linked to the new variant, and news media are reporting the strong possibility partial Covid restrictions will be reimposed at year-end.
But for Pandl, the UK context is not unique in this regard.
"Recent covid developments have been worrisome, and are likely to have some impact on the economic outlook, but that is hardly a UK-specific phenomenon," says Pandl.
Above: Investors have turned bearish on Pound Sterling of late according to positioning data. Image courtesy go Goldman Sachs.
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Prime Minister Boris Johnson on Monday said he would bring in additional restrictions for England if the situation deteriorated further and he was watching the incoming data "hour by hour".
But for the more optimistic thesis regarding Sterling's outlook Goldman Sachs says developments regarding the Bank of England are of significance.
"The Bank of England’s messaging over recent weeks has been clearer: the impact from omicron on activity is likely to be manageable, it could add to inflationary pressures and — most importantly — the economy has made a lot of cumulative progress," says Pandl.
The Bank of England hiked rates by 15 basis points on December 16, prompting a rally in the Pound.
The rally proved to be short-lived but analysts have said it is nevertheless a supportive development for the currency that protects against material downside, particularly against currencies belonging to central banks that are still a long way off from hiking.
The Euro is seen as vulnerable in this regard by a plurality of analysts given the European Central Bank is still some years off hiking, according to money market pricing gauges.
The Bank of England is anticipated by investors to hike again in the first half of 2022 and again in the second half.
The Bank said at its December policy meeting rising inflation levels warranted the proactive policy response
The message on the need to control inflation was a decisive one according to Goldman Sachs' currency strategy team.
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With regards to politics, despite the resignation of the UK's leading Brexit negotiator Lord Frost, Goldman Sachs sense the tensions surrounding Brexit have faded to the extent that they are not posing significant headwinds to Sterling.
"It is also worth noting that, against a backdrop of difficult domestic politics, Brexit-related noise has quieted down somewhat," says Pandl.
"While GBP will continue to be influenced by global risk sentiment, and positioning-related flows could cloud the picture around year end, we think the negative views on Sterling are overdone, and the recent recovery against the Euro can extend," he adds.
That said the point forecasts held by Goldman Sachs don't exactly tally with a call for a further recovery against the Euro: Their Euro to Pound point forecast is set at 0.86 on a three, six and 12 month horizon.
This gives a Pound to Euro forecast profile of 1.1628 over the given timeframe.
It is worth pointing out that strategists at a bank work off models and assumptions that might differ from the model-derived point forecasts that the bank issues.
