Goldman Sachs is sticking to its negative view on the British pound. This comes even though recent UK economic data has shown some improvement.
The bank says many factors are shaping its outlook. These include global risk mood, regional economic trends and currency valuations. But in recent weeks, domestic UK developments have played the biggest role in moving the pound.
UK growth and activity data have been more resilient than expected. However, Goldman points out that they still lag behind the latest numbers coming out of the Euro area. In simple terms, Europe appears to be performing slightly better.
The bank also says that forward looking indicators from Europe suggest this gap could continue. That adds pressure on the pound compared to the euro.
Goldman believes inflation and labor market data will matter more than growth figures in the coming months. If inflation keeps cooling and the job market softens, the Bank of England may feel more comfortable cutting interest rates. Rate cuts usually weigh on a currency.
This view fits with Goldman’s broader outlook that the UK economy may start to catch down with weaker trends seen elsewhere.
Political uncertainty has also added some pressure on the pound recently. But Goldman does not see politics as the main driver. The bank expects political risks to have only short and temporary effects compared to bigger economic forces.
Over the past week, changes in the so called political risk premium have had only a small impact on the euro pound exchange rate.
Goldman is keeping its tactical trade recommendation. It remains long on EUR against GBP with a target of 0.8740. That means it expects the euro to strengthen against the pound.
At the same time, the bank admits there are risks to this view. Many investors are already positioned against the pound. Also, next week’s inflation and labor market data could shift the picture quickly. Those numbers will be closely watched.