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Goldman Warns “Much More Downside” To Come For Pound Sterling

Thursday, October 13, 2016 20:39
% of readers think this story is Fact. Add your two cents. / by Tyler Durden / Oct 13, 2016 6:30 PM

As the pound resumes its post-flash-crash, post-May-Brexit-debate bounce, Goldman’s Silvia Ardagna warns of much more downside pressure to come for Sterling with a cumulative depreciation of as much as 25% by year-end.

How Much More Sterling Downside? (via Goldman Sachs)

1. With the prospect of a ‘hard Brexit’ becoming a reality, investors who were previously expecting a ‘soft’ Brexit, or no Brexit at all, have updated their priors, and Sterling has depreciated about 5 percent over the space of a week against G10 currencies. GBP/$ is about 1.5 percent above 1.20, which is our 3-months forecast published on 5 July 2016. In a recent Global Markets Daily (“How Much Sterling Downside?, 6 Oct 2016), we highlighted that risks to our Sterling forecast were to the downside. In this FX Views, we quantify the magnitude of a potential further fall in the Pound. Based on our benchmark model that assesses the impact of political uncertainty on currencies, the cumulative depreciation of Cable could be as large as 25 percent by year-end, an additional 7 percent decline from its current value.

2. While this estimate is subject to the usual degree of model uncertainty (see below) and should be viewed with a degree of caution, the following additional considerations lead us to think that such a downside move in Sterling is quite likely to materialize over the next couple of months.

First, while difficulties and hostilities around the process of negotiating Brexit have come to the forefront in the past week, in our view, the negative news has not yet been fully reflected in FX.

Second, we expect data to deteriorate over the next year, surprising more to the downside than it has done so far, also weighing negatively on the currency.


The post Goldman Warns “Much More Downside” To Come For Pound Sterling appeared first on Silver For The People.


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