GBP/CHF: Goldman Go Short On Tactical Policy Risks

Goldman Sachs note that "for the last couple of months, markets have been moving to aggressively price a faster and more front-loaded policy response to global inflation pressures, with each tacit acknowledgment of shifting inflation risks from central bankers serving as an invitation to pull hikes forward even more. This week, the "rubber meets the road" for the Bank of England, and markets have set a high bar for the MPC to deliver, essentially fully pricing a 15bp hike for this meeting and close to 60bp cumulatively through February. We think that makes it difficult for the BoE to significantly over-deliver at this point, and sets up room for disappointment if the MPC guides towards a more "measured" pace (in line with our economists' expectations for a 15bp hike, followed by 25bp in February)."

• "This means that the risks are skewed towards GBP downside over the near term. At the same time, rising odds of an ECB shift have exposed long-suppressed vulnerabilities to a sudden withdrawal of policy support in Europe. In this way, the market can act as a self-enforcing mechanism (via wider sovereign spreads) to quiet hiking expectations in response to higher inflation, highlighting the unique challenges facing the ECB. We think these pressures will likely continue, unless or until the ECB steps in with more forceful assurances (such as the calendar-based APP bridge our economists expect to be announced in December to effectively rule out hikes next year)."
• "We recommend investors go short GBP/CHF on a tactical basis, targeting CHF1.23, with a stop at CHF1.27, and revise our 3-month EUR/CHF forecast to CHF1.05 (from CHF1.11 previously)."