Wednesday, July 6, 2016
GOLDMAN SACHS: The pound could crash to $1.20
The UK's currency continued to fall in Asian trading overnight on Tuesday, hitting a low of $1.2798 and falling through the $1.30 level for the first time in 31 years.
But it gets worse: analysts from Goldman Sachs think it could still go much lower. The investment bank thinks we could see sterling break $1.20 before long.
First, here's the chart of sterling against the dollar overnight:Investing
The pound was responding to comments made by Bank of England Governor Mark Carney on the state of the UK economy and to news that a third UK property fund has stopped investors pulling money out amid a rush to the door. The UK's vote to leave the European Union last month is the driving force behind all this.
Now, back to Goldman. Carney's warning on Tuesday that financial risks following Brexit "have begun to crystallize" is at the heart of the Goldman Sachs $1.20 call. More monetary easing could be on the way for the UK, the bank thinks, as the Bank of England battles to contain the financial and economic fallout of the referendum.
Here's what analysts Silvia Ardegna, Robin Brooks, and Michael Cahill had to say:
"Following the Brexit surprise, we revised our Sterling forecasts weaker, but – amid lots of doomsday scenarios for the Pound – resisted the temptation to forecast a free-fall. Now that markets have settled somewhat, we are switching to forecast a second leg of weakness for the Pound, as the Bank of England’s policy response drives the currency weaker."
"Next week, we expect the BoE to provide a further indication of the scope of the conventional and unconventional monetary policy measures we expect. This will be the catalyst for a further downward move in Sterling."
On Tuesday the Bank of England began to act, relaxing capital rules to give banks more breathing room. The move freed up £5.7 billion ($7.4 billion) of capital, "raising banks' capacity for lending to UK households and businesses by up to £150 billion," according to the central bank.