Goldman Sachs is maintaining a bearish stance on the British pound despite signs of recent positive momentum in UK economic data. The bank says that, although international risk appetite, regional macro forces and currency valuation levels all feed into its expectation of Sterling underperformance this year, price action in the pound has been dominated by developments at home.
Goldman notes that UK growth and activity indicators have shown resilience, but stresses these measures have nevertheless lagged behind incoming Euro area data. The firm writes that forward-looking components of European releases suggest the relative strength gap may persist, reinforcing its view that Sterling will underperform versus the euro.
Crucially, Goldman argues that easing by the Bank of England will be driven more by signs of softening in UK inflation and labor market statistics than by the pace of growth. That emphasis on price and labor dynamics forms the backbone of the bank's so-called "catching down" outlook for UK macroeconomic performance over the coming months.
Political developments have recently pressured the pound, the bank acknowledges, but it expects such political risk to be more limited and episodic than the broader macroeconomic forces shaping the currency. Goldman also points out that recent fluctuations in the UK political premium have had only a constrained net effect on the EUR/GBP exchange rate over the past week.
On positioning, Goldman maintains a long tactical recommendation for EUR/GBP with a target of 0.8740. The bank highlights two tactical risks to that call: existing short Sterling positions in the market and the importance of next week's CPI and labor market releases, which could alter near-term dynamics.
Implications
The bank's stance places focus squarely on currency markets and interest-rate-sensitive instruments, given the role of inflation and labor data in potential BoE easing. Traders and investors monitoring EUR/GBP moves will be watching the forthcoming UK inflation and labor market prints closely.
Bottom line: Goldman Sachs is keeping a bearish view on Sterling despite recent resilient UK data, citing relative underperformance versus the Euro area and expecting inflation and labor market signals to be the key drivers of Bank of England policy and Sterling performance.