Currency analysts at Goldman Sachs have revised their forecasts for the pound downward on the back of a markedly weaker global economic risk profile. They also expect restraint from the Bank of England at the same time as more hawkish central banks elsewhere.

Despite the downgrade, forecasts for the euro to pound (EUR/GBP) exchange rate were revised upwards.

“We believe sterling will underperform and are revising our EUR/GBP forecasts upwards to 0.86, 0.87 and 0.88 in 3, 6 and 12 months (from 0.83, 0.84 and 0.85 previously)”.

He also recommends buying EUR/GBP with a target of 0.8600. (GBP/EUR is down to 1.16)

Forecasts for the Pound to Dollar (GBP/USD) exchange rate have also been revised downwards: the dollar is expected to remain down for a long time to come.

The Bank of England will proceed cautiously

GoldmanSachs believes there are two important risks to the Pound. First, it believes that Bank of England (BoE) communication has not been favorable for sterling. Other global central banks have also moved to a more hawkish stance, with six important central banks raising rates in the last few weeks.

If other global central banks raise rates at a faster pace, the pound will lose ground.

GoldmanSachs believes the Bank of England will be concerned about the impact of a weaker currency, particularly because a weaker currency would put further upward pressure on import prices.

It notes: “At some point, the ‘reverse currency wars’ mentality may become more prevalent in the Bank of England’s mind, and a weaker currency would exacerbate the already bleak inflation outlook.”

Nevertheless, a measured stance is expected that fails to support the currency; “at the moment, the Bank of England’s more nuanced approach to balancing growth and inflation has negative implications for the currency.”

Global threats undermine sterling, dollar outlook revised upwards

The Bank sees global risk conditions and the degree of confidence in the global economy as a key negative factor for sterling. It notes: “Sterling has a relatively high cyclical beta factor, so it tends to weaken when recession risks rise.”

Goldman also expects the dollar to maintain a strong tone in the short term, and notes: “growing concerns about growth risks in Europe and China amid increasingly hawkish Fed pricing, as well as declines in global equities – which would normally support the dollar as a safe haven. It is difficult to see what could change this dynamic in the short term.”

The bank still believes the dollar will weaken over the medium term, especially given structural vulnerabilities.

Nevertheless, GBP/USD forecasts have been downgraded significantly, with the three-, six- and twelve-month forecasts cut to 1.22, 1.26 and 1.31 respectively from 1.33, 1.35 and 1.41 previously.