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Analyst at Goldman Sachs see Pound Sterling higher Against the Euro in three Months

Foreign exchange rates

Image © John Gomez, Adobe Stock.

- Investment bank says Pound to benefit on 'no deal' Brexit being avoided

- Euro faces three risks over coming months

- GBP/EUR seen higher by end of first quarter 2019

- GBP/EUR @ 1.1161 today

Pound Sterling is being tipped to move higher over coming weeks and end the first quarter of 2019 higher against the Euro than where it started according to forecasts from Goldman Sachs who say the UK currency will benefit when it becomes clearer a 'no deal' Brexit is avoided.

The Wall Street giant expect the Pound to be heavily influenced by political developments in the run-up to the March 29 Brexit day, with the first key test for the currency coming when lawmakers vote on the Brexit deal secured by Prime Minister Theresa May on January 15. May is expected to lose the vote and it is what comes next that is important for Sterling: the general rule-of-thumb being that a 'no deal' Brexit would likely trigger losses for Sterling while the reaching of a deal will trigger appreciation.

"We continue to expect that the current deal will pass in some form, with the rising threat of tail outcomes funnelling reluctant parliamentarians towards approval of the deal," says analyst Zach Pandl at Goldman Sachs.

While Theresa May is expected to see her deal fail next week, May is widely tipped to bring the vote back to parliament for a second airing once amendments have been made.

We believe it is after the failure of the first attempt that the EU will move forward with a concession on the issue of the Irish border backstop which represents the single largest hurdle to the deal being passed. A Number 10 spokesman says the Prime Minister is still working on securing legal guarantees that the use of any backstop agreement - that would tie the UK to EU law until a solution to the Irish border is found - would only ever be temporary in nature.

However, the EU has said they will no reopen the Withdrawal Agreement to revisit the troublesome issue of the Northern Irish backstop, therefore any concession that satisfies the wishes of both sides will most likely have to come in the form of a codicil - a legal attachment to the existing agreement.

"Should the deal fail in early January, our rank order remains a second referendum is more likely than a ‘no deal’ scenario," says Pandl.

The route to a second referendum however remains unclear to us at this juncture and we believe it is only possible if the government agrees to pursue such an option: Prime Minister May has been steadfast in her commitment to avoiding any further votes on the matter.

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The Euro Facing Three Risks

On the other side of the GBP/EUR exchange rate equation, Goldman Sachs see the Euro as being "under-owned", but there are three potential risks facing the currency.

"We recognise that there are still three major risks that are unresolved - slowing growth, the potential for a messy Brexit, and political tensions within and among member states," says Pandl.

At its last meeting, the ECB acknowledged that risks are “moving to the downside,” and Pandl says it’s hard to argue with the assessment.

Between German cars, Italy’s budget and now French yellow vests, Euro area growth has had to weather one storm after another in 2018. "Still, we think the data will start to improve as those effects fade," says Pandl.

The Euro underperformed rivals Tuesday after official data revealed a second consecutive contraction in German industrial production took place in November, all but ruling out a rebound from weakness seen in the third-quarter and prompting one economist to warn of a "technical recession".

However, with the European Central Bank growing more cautious and markets getting impatient, Goldman Sachs think EUR/USD will remain range bound until the data convincingly turn.

"Until then, risks to our outlook are moving to the downside as well," says Pandl.

Forecast for the Pound vs. Euro Exchange Rate

Goldman Sachs are forecasting the Euro-to-Pound exchange rate to be at 0.85 in three months, this gives a Pound-to-Euro exchange rate of 1.1765.

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