Foreign exchange analysts at Goldman Sachs have slashed their six-month Pound to Euro (GBP/EUR) exchange rate forecast to 1.0870 from 1.1765 previously.
Following the latest Bank of England meeting, however, Goldman Sachs now expects that BoE rates will peak at 5.25% compared with a previous forecast of 6.00%.
This shift, allied with a lack of confidence in the UK economy, has triggered a sharp downgrade to the Pound’s forecasts.
The bank's 12-month GBP/EUR forecast has also been cut savaged to 1.1110 from 1.1905 previously.
The 6-month Pound to Dollar exchange rate (GBPUSD) forecast has also been cut sharply to 1.20 from 1.29 previously and the 12-month forecast lowered to 1.25 from 1.33.
The US Dollar is expected to weaken against the Euro over the medium term, lessening the scale of GBP/USD losses.
Goldman Sachs has been bullish on the Pound with the case for currency gains built on expectations that the Bank of England (BoE) would raise interest rates to a peak of 6.00%.
The BoE, however, held interest rates at 5.25% following the latest policy meeting and, in light of that decision, Goldman has revised its forecasts.
Regarding the decision and statement, it commented; “This has revealed a relatively dovish reaction function and confirmed our economists’ recent downward revisions to their terminal rate forecast, which now assumes no more hikes this cycle.”
Goldman is also worried over the UK fundamentals and risk of weaker economic outlook. It added; “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.”
At the same time as revising its Pound forecasts sharply lower, Goldman does examine the scenarios where the Pound could resist losses.
It considers that the main threat to its bearish forecasts would be incoming data surprises to the upside which would trigger a renewed U-turn on market expectations and lead to a more forceful BoE stance.
Goldman FX strategists, however, consider that this is not a major short-term threat.