Goldman: No Going (All The Way) Back

Goldman Sachs “think it is important to stress that the policy “U-Turn” will not take us all the way back to where things stood a few weeks ago.”

• “This is true in an accounting sense, as only some of the policies have been rolled back, and the government is still likely to face a financing gap in the upcoming OBR report. But it is also important at a more fundamental level, where recent developments have increased the market risk premium on UK assets, eroded some policy credibility, and exposed some important policy preferences from both the government and the Bank of England.”
• “With the Bank of England ending Gilt purchases, UK assets will face another important test this week, and we continue to stress that this can distort the market signal on GBP, as forced repatriation has likely provided a temporary boost for the currency over the last couple of weeks.”
• “When the dust settles, we expect that the BoE will hike less than the market is pricing, and GBP will need to act as the main adjustment mechanism. We maintain our GBP/USD forecast of $1.05 in 3 months.”