Goldman Sachs near-term targets for GBP after the UK Court Decision

From Robin Brooks, Silvia Ardagna, and Michael Cahill at Goldman Sachs Macro Markets Strategy

We have been thinking about the near-term path for the British Pound in terms of two things.

First, there is the question where GBP/$ would trade in the event of "hard Brexit". In recent weeks, we have used a number of approaches to show that Sterling could fall between 20-40 percent relative to pre-referendum levels, with a base for GBP/$ to reach 1.10

Second, there is the question what probability to assign to "hard Brexit". In our minds, it has been this probability that has been moving the Pound around in recent weeks. In particular, the political vacuum following the referendum meant that there was some probability that Article 50 might never be triggered. In the presence of large speculative shorts, this kept the Pound supported after its initial referendum fall. But the conservative party conference changed that, with Prime Minster May committing to trigger Article 50 by March. We thought the market would price a greater probability of "hard Brexit" as a result, reiterating our near-term target of 1.20 for Cable in the days just after the conservative party conference.

Today"s High Court decision is a move back in the opposite direction. It reduces the odds that Article 50 will be triggered by March and, more fundamentally, may limit how aggressive the government can be in its negotiating position. The probability of "hard Brexit" has shrunk, which could see GBP/$ settle around 1.26 in the near term, a half-way house between pre-conservative party conference levels (1.30) and the aftermath of the flash crash (1.22).

That said, we see risk-reward firmly tilted to the downside, notably because - despite today"s switch to neutral from the Bank of England - the data on our economists" forecast will weaken and more easing will come.

Big picture, our conviction is that Sterling needs to weaken more, given that the trade-weighted decline is only 14 percent so far, well shy of our 20-40 percent range.

via eFX

Goldman Sachs near-term targets for GBP after the UK Court Decision
Goldman Sachs near-term targets for GBP after the UK Court Decision
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