Goldman Sachs Slashes Pound Sterling Forecasts vs. Euro and Dollar

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Investment bank Goldman Sachs has lowered its forecasts profile for the British Pound, saying expectations for future UK interest rate levels are less supportive than was previously the case.

The downgrades come just days ahead of the Bank of England's May policy decision, which should reveal disagreements amongst senior policymakers as to the course interest rates should follow.

Analysts at the Wall Street bank say the Pound is caught in the middle of the unsupportive repricing of Bank of England policy expectations and supportive global market sentiment.

"Importantly for the currency, with hawkish policy repricing driving markets recently, the pro-cyclical backdrop for the currency is less supportive than it was earlier in the year, and for now, it means that GBP is unfortunately caught in the middle," says Kamakshya Trivedi, Global Macro and Emerging Markets Strategist at Goldman Sachs.

The Pound fell in April following comments by Bank of England Governor Andrew Bailey and Deputy Governor Dave Ramsden which were interpreted by markets as suggesting these influential members of the Monetary Policy Committee (MPC) are leaning towards near-term interest rate cuts.

"Sterling sentiment turned decidedly more bearish among our client base following comments from Deputy Governor Ramsden, who noted that he felt the balance of risks to inflation were now tilted to the downside. And he stated that economic developments suggested to him that the restrictive stance of policy was reducing the more persistent components of inflation," says Trivedi.

Above: GBP/EUR (top) has lost momentum, while GBP/USD is no longer expected to reach Goldman's previous forecasts.

Losses were ultimately unwound a week after Ramsden's speech thanks to a speech by Chief Economist Huw Pill, who said not much had changed with regards to the inflation outlook in his view. Markets interpreted Pill's speech as indicative of later rate cuts.

"Chief Economist Pill’s later—and more hawkish—speech poured cold water on bearish GBP bets. Pill directly addressed Ramsden’s earlier comments, noting that while he does think that the persistent components of inflation are being squeezed out of the system by restrictive policy, he does not see any reason to believe that it is happening more quickly than expected 6 months ago," says Trivedi.

Former Bank of England Governor Mervyn King recently opined about the lack of diverse thought at the Bank of England and other global central banks, saying it is why they were unable to spot the prospect of a surge in inflation in the wake of the pandemic. Perhaps he will welcome the divergence in views currently on display in the MPC.

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The Pound, meanwhile, is finding limited support from the broadly optimistic global market setup, which has traditionally boosted the currency. In short, stock markets are rallying, but the Pound isn't.

For Trivedi, this creates an unappetising cocktail for the Pound.

"More importantly for the currency, with hawkish policy repricing driving markets recently, the pro-cyclical backdrop for the currency is less supportive than it was earlier in the year, and for now, it means that GBP is unfortunately caught in the middle," says Trivedi.

As a result, Goldman Sachs has lowered its Pound to Dollar forecasts to 1.24, 1.24, and 1.28 in 3, 6, and 12m from 1.30, 1.33, and 1.35.

This implies a forecast path of 0.85, 0.85, 0.84 in EUR/GBP over the same horizon, from 0.81, 0.79, and 0.80 previously.

This translates into a Pound to Euro forecast profile of 1.1765, 1.1765 and 1.19 from 1.23, 1.2660 and 1.25 previously.