Goldman Sachs: Sterling In The Spotlight

Goldman Sachs note that "a weaker July flash PMI, rising hospitalizations and an evolving BoE outlook have focused investor attention on the UK. While the recent activity data have looked more mixed, we stick with our upbeat baseline view of a sustained recovery ahead. But the next couple weeks of data will be important to gauge how the economy - and the health situation - are evolving with fewer activity restrictions. In the face of this, recent BoE speakers have focused on the implications of product and labor supply mismatches, and how policy should respond. While the degree of spare capacity the economy remains a source of debate, and the balance has possibly shifted a bit in recent months, our economists think the core of the committee remains convinced that there is significant slack in the economy and that the recent high inflation readings are temporary. Together with their expectation that the BoE will announce a shift in the exit sequencing at the August or possibly November meeting - favoring a shrinking of the balance sheet before hiking rates - market pricing for liftoff still seems aggressive. With this in mind, we remain relatively cautious on the outlook for Sterling vs. EUR over the near term."