Goldman Sachs: Pound Sterling seen Above 1.20 vs. Euro and 1.30 vs. Dollar on Swift Brexit Resolution Following Conservative Majority

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- Pound-to-Euro exchange rate today: 1.1733

- Pound-to-Dollar exchange rate today: 1.2919

- Sterling to gain in 2020 say Goldman Sachs

- Losses seen on hung parliament

The British Pound is seen holding firm ahead of the weekend, but is nevertheless still ultimately locked within the familiar ranges of past weeks.

The currency remains fixated on the outcome of the December 12 General Election, and market expectations are for a Conservative majority to be delivered by the electorate are keeping the Pound located towards the top of recent ranges. However, with two weeks still to go before the polls open, much can change, and this should contribute to a sense of uncertainty that will keep the Pound from breaking to fresh highs.

Foreign exchange analysts at Goldman Sachs have this week updated their views on the British Pound, saying the currency can move notably higher than current levels were a Conservative majority delivered in the upcoming December 12 election.

"If the current Conservative government were to return with a workable majority, then the Brexit process would move forward faster, with PM Johnson’s deal likely to be passed soon after the election," says Michael Cahill, a currency analyst with Goldman Sachs.

Analysts at the Wall Street investment bank say a Conservative majority would see Sterling move notably higher when compared with current levels against the Euro and Dollar, as a deal will eliminate two notable headwinds facing the economy.

These two headwinds are the prevailing uncertainty surrounding Brexit that has been in place for the past three years, as well as fiscal austerity.

With the Conservatives offering a ready-to-go Brexit deal as well as commitments to expand spending, these two headwinds facing the economy could be eliminated in 2020. Both headwinds could "be altered significantly by the election outcome," says Cahill.

"We think Sterling depreciation since before the Referendum is partly in response to anticipated changes in the country’s trading relationship with the EU, and partly a reflection of elevated policy uncertainty (not least the chance of a “no deal” exit) which has created a significant underweight from real money investors," adds Cahill.

For Sterling, 2020 could well be about how quickly the next steps in the Brexit process are resolved, if at all. Addressing Brexit, and fiscal austerity, "should determine whether the state of play in the UK will encourage inflows to close the market’s underweight, or leave investors on the sidelines," says Cahill.

Goldman Sachs economists say a Conservative government, with a workable majority, would move the Brexit process forward faster, with PM Johnson’s deal likely to be passed soon after the election.

Such an outcome would trigger gains in Sterling.

"We think this scenario should see markets compress the Brexit discount somewhat, taking cable to 1.35," says Cahill.

The Pound-to-Euro exchange rate is meanwhile forecast to go to 1.22 under such a scenario.

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However, there remains a risk of a hung parliament being delivered by the electorate on December 12, an outcome that would inject fresh uncertainty into the UK political outlook which will in turn likely weigh on Sterling.

"A hung parliament would prolong the uncertainty and once again raise the tail risks of both “Remain” and “no deal.” We expect the heightened uncertainty would essentially reverse the recent inflows and push cable back to 1.25," says Cahill.

In a sign of how sensitive the foreign exhcange markets have become to swings in the polls, the Pound was put on the back foot on Tuesday, November 26 after a new poll suggested the gap between the Conservatives and the Labour Party was in the process of narrowing ahead of the crucial December 12 election.

A poll by Kantar showed the Conservatives to be on 43% (-2), Labour 32% (+5), Liberal Democrats 14% (-2) and Brexit Party 3% (+1). This means the Conservative's lead on Labour has swung from 18 last week to 11 this week, suggesting momentum is now fully behind the Labour Party.

Labour's manifesto pledges last week to increase both spending and taxes, nationalise various industries and give cash giveaways to pensioners has gained traction and is now being reflected in the polls.

The surge in support for Labour in the Kantar poll echoes Monday's poll by ICM for Reuters that showed the Conservative's lead over Labour had slipped to just 7%, which suggests a hung parliament is likely.

The Pound's reaction to the Kantar poll was to go lower, as was the reaction to the release of the ICM poll.

This suggests the market is highly attuned to any tightening in the polls, and this confirms the balance of risks remain skewed to the downside over coming days as evidence suggests the gap between Labour and the Conservatives will continue to tighten owing to Labour's steady improvement in the polls.

This weekend's polls should confirm whether this trend of growing support for Labour has continued, and will therefore likely set the tone for the Pound on Monday.

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