Goldman Sachs: Underperformance Ahead

Goldman Sachs note that “sterling is sitting close to recent highs both against the Euro and on a trade-weighted basis, but we think the negatives are starting to pile up. While in many ways the Bank of England was ahead of the crowd shifting towards removing accommodation last fall, more recently the BoE’s tightening plans are hardly leading the way. At the same time, the Spring Statement focused on tax cuts and was more back-loaded than we had expected, leading our economists to trim their forecast for growth this year and next. In addition, building expectations for more rapid rate hikes from the Fed and the ongoing crisis in Europe seems somewhat inconsistent with the relative resilience in riskier assets, so we see room for tactical caution and Sterling tends to underperform in a risk-off environment. Should the growth outlook improve, we prefer short EUR/SEK over short EUR/GBP given the continued strong inflation data in Sweden which we think is undermining the Riksbank’s dovish arguments and should pave the way for a more complete change in tone, unlike in the UK where expectations for the next few meetings set a high bar for the BoE to deliver.”