GBP/USD EXCHANGE RATE TO REACH 1.05 – GOLDMAN SACHS

Currency analysts at Goldman Sachs expect further high sterling volatility in the short term. The Bank of England (BoE) has managed to stabilize conditions, but globally he does not believe the UK’s political course will change enough to provide lasting relief for sterling, especially with weak fundamentals.

He adds: “We believe the underlying trend is for sterling to weaken further and expect cable to fall towards 1.05 as we learn more about the function of the Bank of England’s response in the coming weeks.”

The political mix remains negative for sterling

Goldman Sachs believes the Bank of England’s prevailing policy of limited and timid interest rate hikes, coupled with plans to shrink balance sheets through the sale of gilt bonds, has already been a recipe for sterling’s net losses in global markets.

According to the bank, the UK government’s aggressive fiscal policy has exacerbated underlying vulnerabilities and increased pressure for more aggressive monetary policy.

The bank sees the Gilts purchase as a positive factor in rebalancing policy, but believes the Bank of England needs to do more: ‘We see the temporary Gilts purchase this week as a first step towards fixing this policy mix, but only if easier balance sheet policy is combined with much more aggressive rate rises.’

However, the Bank of England will be constrained by reservations about demand conditions.

Overall, it still believes that UK yields will not be attractive enough to generate sufficient global investment inflows without the added stimulus of a cheap currency.

The bank notes: “Investors are demanding a higher risk premium for UK assets, and with interventions aimed at limiting the speed of yield adjustment, much of this premium should come from a cheaper currency.”


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