Goldman Sachs hikes Sterling forecast

29 Mar 2023

Goldman Sachs has increased its forecasts for the Sterling on bets the Bank of England (BoE) will have to make a radical change to its downbeat forecasts in May.

The banking giant said it is shifting to a more constructive stance on Sterling's outlook due to broad improvements within the domestic environment. However, it is still too early to become entirely positive. 

"We no longer look for idiosyncratic GBP weakness, as investor sentiment on the fiscal side has improved meaningfully," according to Michael Cahill, a foreign-exchange specialist at Goldman Sachs Research.

Goldman Sachs' upgrades to the Pound forecast against the Dollar and Euro followed the Bank of England's rate hike last week and updates on guidance. The BoE said the UK economy likely remained flat at the beginning of the year, yet is now forecast to marginally increase in Q2, Pound Sterling Live reports.

This is a considerable uptick on the 0.4% drop forecast by the central bank's economists last month. 

In regard to the outlook, the BoE said it would rely on upcoming data when making a rate decision in May, which was reiterated by the bank's governor, Andrew Bailey, on Monday during a speech to the London School of Economics. 

The BoE has delivered smaller rate hikes than expected by the market in recent months, which was often linked to a weak Pound. According to data, the Sterling has declined following the Bank of England's decisions.

Goldman Sachs has downgraded it's six- and 12-month EUR/GBP forecasts to 0.88, from 0.89 and 0.90 previously. The three-month forecast remains the same at 0.89 "because BoE dovishness could continue for a bit longer."

For the next six months, this gives a forecast Pound to Euro exchange rate of 1.1364, up from 1.11 previously, and the same 12-month target at 1.1236. 

"We would consider turning even more positive on GBP if we became confident in a revised approach from the BoE," said Cahill.

The three-month forecast for the Pound to Dollar exchange rate is 1.18, 1.19 for the six-month forecast, and 1.25 for 12 months.