Goldman Sachs: GBP could decline a further 7 %

With the prospect of a ‘hard Brexit’ becoming a reality, investors who were
previously expecting a ‘soft’ Brexit, or no Brexit at all, have updated their priors, and
Sterling has depreciated about 5 percent over the space of a week against G10
currencies. GBP/$ is about 1.5 percent above 1.20, which is our 3-months forecast
published on 5 July 2016. In a recent Global Markets Daily (“How Much Sterling
Downside?, 6 Oct 2016), we highlighted that risks to our Sterling forecast were to
the downside. In this FX Views, we quantify the magnitude of a potential further fall
in the Pound. Based on our benchmark model that assesses the impact of political
uncertainty on currencies, the cumulative depreciation of Cable could be as large as
25 percent by year-end, an additional 7 percent decline from its current value.

Why?

First, while difficulties and hostilities around the process of negotiating Brexit have
come to the forefront in the past week, in our view, the negative news has not yet
been fully reflected in FX.

Second, we expect data to deteriorate over the next year, surprising more to the
downside than it has done so far, also weighing negatively on the currency.

Third, we expect that monetary and fiscal policy will continue to place more weight
on economic activity than on inflation; hence, policy news will be at worst neutral
and at best negative for the currency.

Fourth, the repricing of a policy rate hike in December by the Fed and the USD
strength associated with it can also contribute to Cable downside.

The post Goldman Sachs: GBP could decline a further 7 % appeared first on www.forextell.com.

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