Goldman Sachs on GBP: Risks tilted in direction of a sharper decline on Article 50 trigger

Robin Brooks and Michael Cahill at Goldman Sachs Macro Markets Strategy, noted in their latest report that investors should stay short on the GBP in wake of Article 50 trigger.

Key Quotes via eFX:

“We see the path for the British Pound as a function of two things. First, there is the question of where GBP/$ would trade in the event of a "hard Brexit." We have used several approaches to show that Sterling could fall between 20-40 percent relative to pre-referendum levels, with a low of 1.10 for GBP/$ quite possible.”

“Second, what probability should markets assign to "hard Brexit."

“In our minds, it has been this probability that has been moving the Pound around since June of last year. 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.” 

“Our underlying conviction is that Sterling needs to weaken quite a bit more, given that the trade-weighted decline is only 13 percent so far, well shy of our 20-40 percent range.”

“Our 3-, 6- and 12-month forecasts for GBP/$ now stand at 1.20, 1.18 and 1.14, respectively, with risks tilted in the direction of a sharper, more front-loaded decline.”