Goldman Sachs says negative views on exaggerated British pound may recover against euro

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The outlook for sterling is not as bad as current investor sentiment suggests, according to a leading Wall Street investment bank.

Goldman Sachs sees some “positive progress” in the fundamentals of the pound sterling lately and anticipates the continued “rally” of the pound against the euro.

“The history of the pound sterling has been anything but straightforward in recent months, but we think investors may have gotten too negative on the pound sterling,” said Zach Pandl, co-head of currency strategy at Goldman Sachs, at a weekly currency briefing.

The call comes amid short-term weakness in the UK currency thanks to sour sentiment among global investors over concerns about the spread of Omicron.

A nationwide currency drag comes amid heightened concerns over the rapid rise in cases related to the new variant, and media are reporting the strong possibility that partial Covid restrictions will be reimposed at the end of the year.

But for Pandl, the British context is not unique in this regard.

“The recent developments in Covid have been concerning and are likely to have some impact on the economic outlook, but it is hardly a UK-specific phenomenon,” Pandl said.

Positioning against Pound builds

Above: Investors have turned bearish on the British pound lately according to positioning data. Image courtesy of Goldman Sachs.

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Prime Minister Boris Johnson said on Monday he would introduce additional restrictions for England if the situation deteriorated further and that he was monitoring incoming data “hour by hour”.

But for the more optimistic thesis regarding the outlook for the pound sterling, Goldman Sachs says developments regarding the Bank of England are important.

“The message from the Bank of England over the past few weeks has been clearer: the impact of omicron on business is likely to be manageable, it could add to inflationary pressures and, most importantly, the economy has made many cumulative advances, ”Pandl said.

The Bank of England raised rates by 15 basis points on December 16, causing the pound to rebound.

The rally turned out to be short lived, but analysts said it was nonetheless a favorable development for the currency that protects against large declines, especially against currencies owned by central banks which are still a long way off. of the increase.

The euro is seen as vulnerable in this regard by a number of analysts given that the European Central Bank is still a few years behind, according to money market price gauges.

Investors expect the Bank of England to rise again in the first half of 2022 and again in the second half.

The Bank said at its December policy meeting that rising inflation levels warrant a proactive policy response

The message about the need to control inflation has been decisive according to Goldman Sachs’ currency strategy team.

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On the policy side, despite the resignation of Britain’s top Brexit negotiator Lord Frost, Goldman Sachs feels the tensions surrounding Brexit have eased as long as they do not pose significant headwinds for the pound sterling. .

“It should also be noted that, against a backdrop of difficult domestic politics, the Brexit noise has subsided somewhat,” Pandl said.

“While the British Pound will continue to be influenced by global risk sentiment and positioning flows may darken the picture towards the end of the year, we believe that the negative views on the British Pound are overstated and that the recent rally against the euro may extend, “he adds.

That said, the one-time forecast held by Goldman Sachs does not exactly correspond to a call for a further recovery against the euro: their Euro / pound point forecast is set at 0.86 over a three, six and 12 month horizon.

This gives a forecast profile for the Pound to the Euro of 1.1628 over the given time period.

It should be noted that a bank’s strategists develop models and assumptions that may differ from the one-off model-derived forecasts issued by the bank.

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