Goldman Sachs Upgrades Pound Sterling Forecasts
- Written by: Gary Howes
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Image © Adobe Stock
Analysts at Goldman Sachs have upgraded their tactical stance on the British Pound to "outright constructive" amidst a surprising UK economic resilience and fading central bank divergence risks.
"We have been arguing for some time that Sterling's fundamentals have improved, and markets were not fully appreciating that," says Kamakshya Trivedi, Head of Global FX at Goldman Sachs.
In February, Goldman Sachs recommended taking profits on Sterling shorts, arguing at the time that the UK currency should no longer underperform on the 'crosses' (non-USD exchange rates).
The move was an effective upgrade of the Pound from underweight to neutral.
But, now it is time to get bullish.
"We are now taking an outright constructive stance," says Trivedi.
The call comes amidst ongoing outperformance by the Pound which has caught the majority of investment bank analysts by surprise as the consensus forecast the key Pound exchange rates to be notably lower than is the case at this point in the second quarter.
"Essentially, we think that the same factors that acted as headwinds on Sterling in 2022—mostly natural gas prices and the relative stance of BoE policy—have turned to tailwinds," he explains.
GBP has risen 1.87% against the EUR in 2023, with gains of 4.40% coming against the Dollar. In fact, the currency has risen against all its G10 peers this year.
Goldman Sachs analysis finds the UK's terms of trade have improved since August 2022 and this ensures the magnitude of the likely real income squeeze has diminished meaningfully.
Goldman Sachs' call comes amidst a streak of UK economic data surprises, a key driver of currency performance.
The UK surprise index, compiled by Citi, shows how UK data has been outperforming, a key ingredient of Pound Sterling outperformance in 2023:
Image courtesy of Reuters.
The Bank of England and other institutional forecasters saw the UK economy falling into a recession that would last through the duration of 2023, something that has yet to materialise.
Indeed, incoming survey data suggests something of an economic revival has occurred, despite elevated inflation and interest rates.
Goldman Sachs says UK house prices have since stabilised, with the much-watched Nationwide index showing a rise in April as a multi-month run of declines ended.
April saw a 0.5% rise in house prices after seven consecutive falls, meaning the annual figure read at -2.7%, up from -3.1% previously.
"This has not only created room for a shift in the BoE’s policy stance but also eased the pressure on government finances," says Trivedi.
A key near-term risk to the Pound is Thursday's Bank of England interest rate decision where policymakers could push back against the market's current expectation for a further 60 basis points of hikes by September.
The Bank of England was reluctant to validate market expectations through much of 2022, resulting in Pound Sterling underperformance.
But Goldman Sachs says "even if the BoE remains in the “reluctant hiker” camp, most other G10 central banks have now joined that group as well, so the case for divergence is less clear".
In fact, economists at the Wall Street bank suggest the Bank of England arguably has more to do to "see the job through".
"Relatedly, relatively brighter European growth prospects (or at least less evident storm clouds) should also support the Pound," adds Trivedi.
Goldman Sachs revising their EUR/GBP forecasts to 0.86, 0.87 and 0.87 in 3, 6 and 12 months (vs 0.89, 0.88 and 0.88 previously).
This gives a Pound to Euro forecast profile of 1.1630 and 1.15.
