The Case For Underperformance Is Building Again

Goldman Sachs note that they recently pulled back on their “bearish GBP view after it looked like the BoE might be wavering on its inflation narrative, especially because GBP shorts seemed heavily positioned. But, we think the case for GBP underperformance is strengthening again, mostly because of the anticipated policy response to recent events. Political uncertainty increased in the UK after PM Johnson’s resignation. FX markets initially traded this as a positive development for GBP, presumably on the prospect for more expansionary fiscal policy in the near term and possibly a more moderate trade policy in the medium term. But, the recent sharp deterioration in the European growth outlook complicates matters, in our view. The government changeover could actually hinder a quick legislative response to fresh cost pressures, for example. In addition, the key divide on the BoE is over the outlook for consumers, and the distribution of risks have decidedly deteriorated since the last meeting. Arguably, the shifting outlook for Euro area growth could have bigger consequences for BoE policy over the next few meetings than the ECB, and the 130bp priced over the next 3 MPC meetings seems excessive.”