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Post-budget rebound to fade says investment bank.
Goldman Sachs says pound ’s direction from here will be shaped by the softening trend in economic data and the prospect of faster-than-expected Bank of England easing.
In a new weekly FX overview, the investment bank says November’s Budget delivered “a set of measures fairly close to market expectations,” avoiding the more disruptive outcomes investors had feared.
Goldman Sachs says the announcement “steered clear of the more currency-negative outcomes of either a larger near-term fiscal contraction than anticipated or of delivering too little of an overall consolidation that sees a reintroduction of UK fiscal risk premium in the currency.”
The bank notes that sterling’s modest recovery following the announcement reflected this middle-ground outcome.
💬 “We see Sterling’s slight relief rally… as consistent with that more middle-of-the-road outcome,” it says.
Goldman Sachs adds that the rebound was also helped by a reduction in tactical bearish positioning by market participants that had built up before the event.
It says the immediate risks around the Budget have been “benign,” with realised FX moves falling short of what markets had priced in.
The bank argues this dynamic has helped reduce implied volatility in sterling this week, easing some of the tension that had accumulated ahead of the announcement.
🔎 Looking ahead, Goldman Sachs expects the UK’s weakening economic backdrop to play a larger role in determining sterling performance.
“From here, we continue to think the softening trend in UK data and the prospects for faster-than-expected BoE easing remain key to further Sterling underperformance,” the bank says.
It notes the Budget is unlikely to add to these currency-negative pressures but does not alter them either.
⤴️ Goldman Sachs’ economists have slightly raised their 2026 GDP growth forecast by a tenth and left inflation unchanged.
The bank says the updated fiscal stance does not complicate the Bank of England’s task, and early comments from policymakers indicate some may even see the measures as supportive for disinflation.
📉 Despite this, the bank maintains that structural factors still weigh on the pound.
“Overall, we continue to see the UK’s underlying data and monetary policy trajectory, alongside clear structural Sterling overvaluation, as supportive of further underperformance on European crosses,” it says.
The research says upcoming UK data and the December 17 Monetary Policy Committee meeting could offer renewed opportunities for traders seeking to position for further weakness.
“In our view, the mid-December round of UK data and the December MPC offer good opportunities to re-engage at better levels and with cleaner positioning,” the bank says.
🔄 For businesses and households planning currency transfers, the message from Goldman Sachs is that sterling may face further pressure against the euro if economic data continues to soften and if expectations build for more aggressive BoE rate cuts in 2025.
The bank’s assessment suggests that near-term rallies may prove short-lived, with the broader trend still pointing towards underperformance on European currency pairs unless growth momentum improves materially.
An original version of this article can be viewed at Pound Sterling Live
