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Upside Risks to Pound Sterling Mount say Goldman Sachs

Pound can go higher

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- Road to 'no deal' narrows says Wall Street bank

-Pound is best-performing major currency of past month

- But too soon to jump into bets for sustained rises in Sterling

According to Zach Pandl, an analyst with Goldman Sachs, the recent developments in UK politics "has narrowed the path to a 'no deal' Brexit, skewing near-term risks to Sterling to the upside."

Pandl cites the passing of legislation by parliament that forces the Government to request a Brexit extension, should it fail to reach a deal with EU negotiators, as one reason why the path to a 'no deal' has narrowed.

Another reason, being the decision by opposition parties "to thwart the Conservative government’s efforts to force a general election before an extension has been secured."

"We think the net effect significantly lowers the odds of a 'no deal' outcome next month," says Pandl.

The developments have seen foreign exchange markets reprice Sterling by sending it higher against the Euro, U.S. Dollar and other major currencies.

In fact, if we look at Sterling's performance over the past month, we can see it is the best performing major currency:

Pound is best performer

The GBP/EUR exchange rate has recovered from August lows at 1.0722 to trade at 1.1189 at the time of writing, its highest level since late July.

The GBP/USD exchange rate has recovered 1.1959, reached on September 01, to be quoted at 1.2363 at the time of writing.

However, Goldman Sachs are cautious of Sterling's ability to move substantially higher as they believe the odds of a General Election remain high, "and we are sufficiently unsure about PM Johnson’s likely strategy over the coming weeks to recommend new longs at this stage."

'Longs' refer to trades that would profit on Sterling appreciation.

Analysts think there is a possibility that the PM backs away from demands for an early election and pivots to some type of revised deal (e.g. one which replaces the controversial backstop with other arrangements acceptable to Brussels).

This might be a positive outcome for Sterling that markets have thus far underpriced says Pandl.

Goldman Sachs are forecasting the Pound-to-Dollar exchange rate to be at 1.20 in three months, and 1.29 in six months. The one-year target is at 1.41.

The Pound-to-Euro exchange rate is forecast at 1.11 in three months, 1.15 in six months and 1.1765 in one year.

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