Goldman Sachs: Policy Tightening Likely To Outweigh Downside Risk To Growth

Goldman Sachs note that "the UK economy is facing something akin to a supply shock: relative to expectations, the short-run productive capacity of the economy is narrower than anticipated, resulting in less growth and higher inflation. Policymakers appear concerned about the surge in inflation expectations, and our economists now expect a Bank Rate hike at the November 4 MPC meeting. In general, weaker domestic growth is negative for a currency, but higher front-end rates are a positive. On net, the shift in monetary policy should outweigh the negative effects on the currency from slower growth in this case, resulting in modest Sterling appreciation on the margin."

• "Policy tightening caused by a supply shock should be less positive for FX than equivalent tightening caused by a demand shock, but concerns that BoE rate hikes will result in Sterling depreciation (as growth expectations spiral downward) are misplaced. Look for modest further downsinde in EUR/GBP ahead of the November MPC meeting."