Economic outperformance boosts pound to near one-year high, Goldman Sachs predicts upward trend to continue
The UK economy has grown beyond expectations, leading to the pound nearing a one-year high. Goldman Sachs predicts that the pound will continue to rise in the coming weeks. The newly elected Labour government in the UK and the expectation of a delayed interest rate cut by the Bank of England have supported the pound. Goldman Sachs forecasts that the pound against the US dollar could rise to 1.30 within two weeks. UBS Investment Bank expects the pound against the euro to remain around 0.8400 pounds to 1 euro in the long term. The market expects the Bank of England to cut interest rates by 45 basis points this year. Goldman Sachs believes that the pound against the US dollar will rise in the short term
According to the Zhitong Finance and Economics APP, the British pound approached a one-year high after a report showed that the UK economy grew more than expected. Goldman Sachs predicts that the pound will continue to rise in the coming weeks.
The pound rose 0.2% against the US dollar to 1.2879, reaching its highest level in four months. This is due to the UK economy growing at twice the expected rate in May after stagnating the previous month. Goldman Sachs recommends buying the pound, stating that the pound against the US dollar could rise to 1.30 within two weeks.
Investors are optimistic that the newly elected Labour government, which won the majority of votes last week, will bring a period of political calm and take prudent measures on national finances. Bets that the Bank of England will delay interest rate cuts also supported the pound.
Shahab Jalinoos, Global Head of Foreign Exchange Research at UBS Investment Bank, said, "With a majority in place, the UK is now arguably the most stable government among the G7 for the next five years. We believe that post-Brexit referendum, the pound should finally see structural flows moving in a favorable direction for the first time."
He added that this would keep the pound against the euro long-term around 0.8400 pounds to 1 euro. On Thursday, the pound traded at 0.8427 against the euro, hovering near a two-year high for the pound exchange rate.
Traders delayed bets on a rate cut next month. Earlier this week, Huw Pill, Chief Economist at the Bank of England, said that the timing of the first rate cut remains a "live question," echoing comments from another policymaker, Jonathan Haskel.
Currently, the money markets estimate a 45% chance of a rate cut by the Bank of England in August, with a total cut of 45 basis points by the end of the year. This is similar to market expectations for a rate cut by the Federal Reserve in 2024, indicating that the interest rate differential between the UK and the US is unlikely to widen significantly.
For Goldman Sachs, this provides room for the pound against the US dollar to rise in the short term. The bank has been predicting since the beginning of this year that the pound against the US dollar will reach the 1.30 level.
Goldman Sachs strategist Karen Reichgott Fishman said, "Long-term bullish pound crosses are also attractive to us, especially relative to other 'high-risk' currencies."