Goldman Sachs sees GBP/USD falling towards 1.28 as UK fiscal risks and relatively high Bank of England pricing leave Pound Sterling vulnerable.
The Pound to Dollar (GBP/USD) exchange rate has recovered from late-July lows, but Goldman Sachs still expects Sterling to weaken towards 1.28.
GBP/USD was trading around 1.3446 on Tuesday, having gained 0.6% over the past month.
The pair touched 1.3558 in July before falling back, with the latest rebound largely driven by broad Dollar weakness.
Goldman has now closed its tactical short GBP/USD recommendation for a small profit, but its broader Sterling view remains cautious.
“We continue to expect Sterling underperformance over the medium term, driven by bouts of fiscal premium and an unwind of BoE hike pricing,” the bank said.
That leaves the direction lower even if the timing is less straightforward.
GBP/USD has recovered from below 1.33, but the latest rally has struggled to hold above the 1.35 area.
Goldman says Sterling’s near-term risks are now “more balanced” after the recent rebound, particularly as EUR/GBP has moved back closer to the level implied by cyclical fundamentals.
The bigger concern sits further ahead.
“On the former, after some question marks around funding propositions in week one, fiscal news in the second week of the Burnham government has been comparatively light,” Goldman said.
“We suspect this largely remains the case until closer to the Autumn Budget.”
That relative calm may not last. Goldman expects fiscal concerns to return once the Budget approaches, with renewed pressure likely if the government struggles to explain how new spending or tax measures will be funded.
“Many of the fundamental constraints to fiscal policy still [remain] in place,” the bank said, adding that another period of fiscal volatility would likely produce “short-lived but asymmetrically negative bouts of Sterling pressure”.
Near-Term GBP/USD Outlook: BoE Pricing Leaves Pound Sterling Exposed
The Bank of England is the second part of the story.
Goldman said its main takeaway from the latest MPC meeting was the “patient tone from the on-hold majority”, particularly from Governor Bailey and Deputy Governor Lombardelli.
The bank’s economists have “reiterated their no-hike baseline”, while market pricing through to year-end has moved further above Goldman’s own forecast than in any other G10 market.
“We see [this] as a likely source of downside Sterling pressure in the months ahead,” Goldman said.
The latest bank consensus range shows a wide spread of GBP/USD forecasts, with the current rate near the middle of the third-quarter distribution.
In our view, the main risk is not an immediate collapse in Sterling, but a slower repricing as markets pare back expectations for tighter UK policy and refocus on the autumn fiscal outlook.
Goldman’s 1.28 target sits below the current bank consensus median and would represent a fall of roughly 5% from current levels.
Our currency coverage draws on live market data, official economic releases and published bank research.
