According to Goldman Sachs, a combination of firm US Dollar and less favourable global growth conditions will undermine the Pound.
It has lowered both the 3 and 6-month Pound to Dollar (GBP/USD) exchange rate forecasts to 1.24 from 1.30 and 1.33 respectively previously.
The 12-month forecast has also been lowered to 1.28 from 1.35.
GBP/USD is trading around 1.2550 ahead of this week’s Bank of England (BoE) policy decision.
As far as the US economy is concerned, Goldman still considers that the labour market is firm and that the Fed will have to keep high interest rates for an extended period which will underpin the dollar.
Goldman notes that mixed BoE rhetoric will fuel further uncertainty over interest rates.
It also notes that inflation will decline sharply for this month’s reading which will increase speculation of near-term rate cuts.
Although there is an impotent degree of domestic uncertainty, Goldman’s change in Pound stance primarily reflects a shift in global conditions.
In view of recent inflation data, it expects that interest rate cuts across the G7 area will be delayed which will have a negative impact on the global economy.
Given the UK currency’s sensitivity to global conditions and risk appetite, it has therefore downgraded the Pound outlook.
Key Quotes:
"Sterling sentiment turned decidedly more bearish among our client base following comments from Deputy Governor Ramsden..."
"...economic developments suggested to him that the restrictive stance of policy was reducing the more persistent components of inflation."
"However, Chief Economist Pill’s later—and more hawkish—speech poured cold water on bearish GBP bets."
"Pill directly addressed Ramsden’s earlier comments, noting that while he does think that the persistent components of inflation are being squeezed out of the system by restrictive policy..."
"The difference in opinion sheds light on ongoing discussions at the Bank of England about the proper course of policy."
"With hawkish policy repricing driving markets recently, the pro-cyclical backdrop for the currency is less supportive than it was earlier in the year..."
"As a result, we have lowered our Cable forecasts..."
"...Sterling investors’ focus for now has turned instead to the upcoming inflation print, where resetting of household energy prices should mean a sizeable drop versus March."