Goldman Sachs Pound Forecasts: Lows against U.S. Dollar and Euro to be Retested

Image © Adobe Stock

Investment bank Goldman Sachs has slashed its forecasts for the British Pound, showing further losses against the Euro are likely and a retest of the recent lows against the Dollar are likely.

Economists at the Wall Street bank reckon a recovery is only likely in three months out.

The latest forecast update comes amidst a period of acute stress for the Pound, which fell to a record low on Monday, Sept 26.

A flash crash occurred during Asian trade, which is notorious for thin liquidity conditions.

The sell-off was an extension of Friday's European and U.S. action which came in the wake of the UK government's new fiscal plans that saw significant tax cuts announced.

The cost of UK borrowing surged and the Pound fell, a classic signal markets were questioning the UK's ability to fund the tax cuts and pledge to cap household and business energy costs.

Analyst Michael Cahill at Goldman Sachs says the "policy sets a concerning course".

But, "policy" in this instance also includes that pertaining to the Bank of England.

Like other economists, Goldman Sachs reckon the main issue for Sterling is that fiscal and monetary policy are pulling in opposite directions.

Fiscal policy has been loosened considerably (tax cuts, energy price cap guarantee) while the Bank of England continually fails to raise interest rates by the required amount.

Last week we saw the Bank once again underwhelm with a 50 basis point hike, where markets were looking for 75bp.

Pound Sterling Live wrote repeatedly of economist warnings that the Bank would need to meet the market if it was to defend the Pound.

They didn't and the UK currency is nursing significant losses.

"The Bank of England did not set a more aggressive tone, which became even more out of step with market dynamics following the large fiscal easing package unveiled later in the week," says Cahill.

Goldman Sachs economists had argued that the path forward for Sterling would depend heavily on the monetary response to inflation over the near term and well-targeted fiscal measures, "but so far the delivery has been less than encouraging on both fronts," says Cahill.

Above: GBP/USD (top) and GBP/EUR (bottom) at 15 minute intervals. To better time your payment requirements, set your FX rate alert here.

They say the Pound is set to weaken further thanks to a combination of broad unfunded spending on the fiscal side unmatched by monetary policy to offset the inflationary impulse.

Economists at the Wall Street bank now also expect a larger increase in the policy rate at the next meeting in November.

We note however that others are saying the Bank must respond before then to regain the initiative.

"It's possible that the Bank’s refreshed projections and assessment of PM Truss's fiscal policy will allow them to strike a more forceful tone on inflation, but significant uncertainty remains," says Cahill.

Against the backdrop of the large fiscal spend and question marks around the size and urgency of the monetary response, Goldman Sachs have cut their forecasts for Pound Sterling.

The Euro to Pound exchange rate is raised to 0.92, 0.90, 0.88 in three, six, and 12 months, up from previous point forecasts for 0.85, 0.83, and 0.84. To manage your FX payment requirements you could consider setting an order, more about this here.

This gives a Pound to Euro profile of 1.0870, 1.11 and 1.1364, down from 1.1765, 1.2050 and 1.19.

The Pound-Dollar forecast profile is cut to 1.05, 1.08, and 1.19 from 1.14, 1.17, and 1.25 previously.

"We expect the Pound to bottom in 3 months given these factors, but if policy does not eventually change tack, then we would expect Sterling underperformance to persist for longer," says Cahill.