Goldman Sachs’ three reasons to expect GBP stabilisation and recovery

Goldman Sachs analysts suggest the British Pound can stabilize despite recent declines, although risks remain:

• GBP is “down but not out”

The background to GS’ views are the recent sharp weakness in the pound:

• investor concerns about UK debt market dynamics, with bond sell-offs driving yields higher and raising government borrowing costs
• broader concerns about the UK’s growth fundamentals and ineffective policies to boost economic growth and tax revenue

Goldman Sachs note three reasons to expect GBP stabilisation and recovery:

1. recent GBP weakness partly reflects a broader risk-off sentiment in FX markets, which may reverse as risk appetite recovers
2. fiscal risks in UK Gilts could compress, reducing pressure on the pound
3. upcoming hard data on increased government spending and investment might surprise positively, bolstering sentiment

Risk to the view include:

• a hawkish Federal Reserve, combined with strong U.S. inflation and labor data, creates a challenging environment for GBP/USD … difficult for the Pound with higher global yields, as well as to Dollar strength more directly
• potential “escalation in the loop of sell-offs in UK assets and a more strenuous fiscal position”

GS prefer GBP against EUR:

• the Euro may face challenges from potential tariffs under Trump

Cable update:

This article was written by Eamonn Sheridan at www.forexlive.com.