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The currency research and strategy team at Goldman Sachs have slashed their forecasts for the Pound as they announced they have "officially shifted back to Sterling bears".
The call is a notable one given Goldman has been on the right side of the Pound's rally over the course of the past year but their view has shifted in the wake of the Bank of England's decision to pause its interest rate hiking cycle on September 21.
The new forecast levels are notable as they are consistent with values reached in previous UK-centric crises - such as the Liz Truss minibudget, but Goldman Sachs researchers indicate the crux of their downgrade is the Bank of England's 'dovish' tendencies.
"After being the top performing G10 currency year-to-date at the start of summer, Sterling unwound most of its gains by the end of it. The weaker cyclical outlook in Europe and, moreover, the BoE's dovish reaction function have outweighed the benefits from lower energy prices (relative to last year) and broadly constructive risk sentiment," says a note from Goldman Sachs.
Goldman's previously constructive stance towards Pound Sterling was premised on an assumption the Bank of England would push Bank Rate to 6% owing to the strength of UK economic data, which would boost the value of UK financial assets relative to where central bank rates were lower.
But Goldman's analysts note the Bank maintains "a relatively dovish reaction function" to data that meant even the slightest downshift in the UK data pulse was taken as a reason to press the pause button.
Above: GBP has lost ground against the majority of its peers over a one-month timeframe.
UK rate hike expectations have been falling steadily since August as data has cooled but the decision to forgo a rate hike in September still proved surprising as recent UK labour market and wage data has proven robust.
The Bank appears to have leant heavily on last week's inflation numbers that came in on the softer side of expectations as did the September PMI figures, which the Bank had sight of ahead of the official release.
Goldman Sachs economists say the Bank of England has completed its rate hiking cycle.
"A combination of weaker growth, high inflation, and lower real rates is a negative mix for the currency. If the incoming activity data reflect a more negative domestic growth picture than we expect, the currency would come under even more pressure," says the note.
Goldman Sachs lowers its Pound to Dollar forecast profile to 1.18, 1.20, and 1.25 in 3, 6, and 12 months from 1.24, 1.29, and 1.33 previously.
They forecast the Euro to Pound exchange rate at 0.91, 0.92, 0.90 over the same timeframe, up from 0.86, 0.85, 0.84 previously.
This gives a Pound to Euro profile of 1.0990, 1.0870 and 1.11 from 1.1630, 1.1765 and 1.19.
Note these are levels typically associated with UK-centric crises of confidence, notably the 2008 financial crisis and the Liz Truss mini-budget.
"We think the main headwind to further GBP weakness would be if incoming data surprise to the upside, revealing the recent progress to be a red herring and pushing the BoE back towards a more “forceful” response. However, such a shift would likely take some time to play out, leaving us comfortable with a tactically bearish view for now," says Goldman Sachs.