Forecasts for the British Pound Confirm Significant Rises Ahead (Goldman Sachs)

Pound forecasts from Goldman Sachs suggest gains of 12 pct lie ahead.

Those hoping for a higher pound sterling will welcome news that the entrenched uptrend will continue.

However, exporters will take the news as confirmation that the outlook remains challenging and confirms the need to hedge exposure to the currency and lock-in decent exchange rates.

The pound sterling has risen 6.60% against a basket of currencies between the beginning of January to the 11th of August according to Bank of England data.

This is just the upper end of a well-defined uptrend:

New research from Goldman Sachs confirms that the period of appreciation is not yet over warning that any declines in the British pound should be viewed as a temporary pause.

It is worth stating from the outset that gains are most likely to come against currencies such as the euro and Australian dollar as opposed to the US dollar – in the same research note Goldman Sachs warn the USD will also strengthen.

In short, sterling and the dollar are being driven by the same underlying forces.

12% Appreciation

The pound sterling has suffered fresh weakness in August with the Bank of England knocking the GBP with comments suggesting there will be no rush to raise interest rates in coming months.

Goldman Sachs write to clients that this episode reminds them of the "fear of floating" in Asia before the global financial crisis.

Back then, Asian currencies were on a strengthening trend, which central banks in the region tried to temper through intervention.

“This slowed the appreciation path, but ultimately only reinforced the trend. We see recent shifts from the Fed and Bank of England – the two G10 central banks closest to 'lift-off' – in a similar light. Appreciation pressure on the Dollar and the Pound may delay 'lift-off', but – with policy rates so far below neutral – both central banks will ultimately have to accept stronger currencies,” say Goldman Sachs.

The investment bank confirms they are sticking to their call for the Dollar to rise 20% in the next three years and why they remain bullish on the Pound, which we expect to rise 12% over the same horizon.