Goldman Sachs: Policy Pressures On The Underperformance View

Goldman Sachs have "expected Sterling to underperform other European crosses, largely on our economists' view that the Bank of England will prioritize balance sheet policy over rate hikes, limiting the upside to UK front-end rates. With the UK economy still facing a challenging mix of downside risks to activity from the rise of the Delta variant, as well as waning policy support from the furlough scheme, there are nevertheless rising challenges to this view. Looking abroad, stronger inflation outturns in the U.S. and lingering virus concerns have brought back the U.S. outperformance narrative, where Sterling tends to perform better than its continental peers. In addition, a number of other central banks have brought forward the prospect of rate hikes given strong reopening momentum and stronger, more persistent inflation threats. There appears to be a rising risk that the Bank of England will follow suit. This past week, External MPC Member Saunders said that an early end to the QE program should be on the table at upcoming meetings, and Deputy Governor Ramsden said that, in his judgment, the balance of risks to the inflation outlook have shifted and he can "envisage those conditions for considering tightening being met somewhat sooner." With this in mind, we will be closely watching Deputy Governor Broadbent's speech on the inflation outlook for possible signals on the policy response and balance sheet vs rate hike sequencing. This will be an important marker for whether our relatively cautious Sterling view remains appropriate."