The pound is ‘still a sell’ as Goldman backs call for drop to $1.20

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Sterling still looks vulnerable to veering lower, says Goldman Sachs, adding that it would be prudent not to get cozy with the idea that the British economy has escaped unscathed from the Brexit vote.

The British currency is trading around $1.33 against the U.S. dollar while the euro is fetching roughly 84 pence. That compares with Goldman’s three-month call, issued in July, to see the pound-dollar pair reach a low of $1.20 and the euro to rise to 90 pence, respectively.

The pound has fared better than Goldman had anticipated after the Bank of England in August launched an aggressive stimulus program to cushion the British economy from the country’s vote on June 23 to leave the European Union.

On Thursday, the pound — which investors have shorted at record levels recently— leapt after an unexpectedly strong reading in U.K. manufacturing PMI in August, which hit a 10-month high.

The “majority of U.K. data has surprised on the upside over the past month,” supporting the pound’s performance, said Goldman strategists Silvia Ardagna, Robin Brooks and Michael Cahill in a research note released early Thursday, before the PMI data were issued.

“This is leading investors to take the view that the outlook may not be as negative as thought right after the referendum. If they are right, then the [central bank] will not deliver further stimulus before year-end,” they said. “We disagree with this view,” in part because “not all of the data that has been released is the most relevant to assess the economic impact of the referendum’s outcome.”

Stronger-than-expected third-quarter retail sales in July, for example, shouldn’t be viewed as a leading indicator as the correlation between growth in quarterly retail sales and the portion of gross domestic product that gauges household spending is “quite low,” the strategists said.

Even with the rebound in U.K. manufacturing PMI in August, Britain’s gross domestic product “would still be flirting with recession” in the second half of the year.

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