Key insights
- Goldman Sachs suggests global factors now outweigh domestic ones for the British Pound. While recent UK data is positive, the Bank of England is unlikely to meet market rate hike expectations. Sterling is overvalued and faces political risks. GS sees more downside than upside for the currency, especially against commodity exporters like the USD and AUD. Overall, this has a slightly negative implication for US equities as it reflects global economic uncertainty.
Investing.com - Goldman Sachs said global dynamics should dominate regional factors for Sterling as markets face a terms of trade shock the firm expects to be longer lasting.
The firm said domestic UK macro themes were central to its regional Sterling underperformance view before the energy shock, but the key drivers of the currency have since shifted. Goldman Sachs noted a clear positive turn in this week’s UK data stands in contrast to a deterioration in the Euro area, reversing part of the underperformance in UK data that was a key theme of last year.
The firm said resilient data has been a key source of recent support for the currency at an aggregate level, though caveats and quality concerns exist around many UK releases. Goldman Sachs said other domestic considerations present more of a challenge to Sterling, with its economists expecting the Bank of England is unlikely to meet the material hike premium priced by markets for this year.
Firm analysts added that the currency remains highly overvalued on its structural GSDEER metric and bouts of fiscal and political risk premium remain a risk. Goldman Sachs noted Sterling’s imprint from political uncertainty over prior months has been more tactical than fundamental, but the firm sees risks to the currency as asymmetrically negative ahead of the May 7 local elections.
Goldman Sachs said the case for Sterling underperformance is clearer against terms of trade beneficiaries such as the dollar or Australian dollar rather than in crosses more sensitive to UK domestic considerations such as EUR/GBP. The firm said Sterling should remain highly levered to any further recovery in global risk sentiment, but its energy-importer attributes and the balance of UK domestic macro themes imply more value in the negative side of its distribution.
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