Goldman: Pound to hit 15-year highs against the euro
We are in a "multi-year phase of a US dollar recovery" and markets are underestimating the power of the trend
By Ambrose Evans-Pritchard, International Business Editor
4:52PM GMT 20 Nov 2014
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Pound heading to €1.54 by 2017, according to the US investment bank Photo: Joe Partridge/Rex Features
Sterling is to climb relentlessly against the euro over the next three years and will reach levels last seen at the turn of the century, according to new forecasts by Goldman Sachs.
Sterling is to climb relentlessly against the euro over the next three years and will reach levels last seen at the turn of the century, according to new forecasts by Goldman Sachs.
The US investment bank said the dollar will rise even faster as the American economy powers ahead and interest rates rise steeply, touching parity against the euro and climbing to 140 Japanese yen. The Brazilian real will tumble to 3.10 as the commodity boom continues to deflate.
“We are in a multi-year phase of a US dollar recovery. The market may be underestimating the scope and persistence of that trend,” it said.
The euro will drop to 0.65 against the pound by 2017, driven by capital inflows rather than trade effects. This approaches levels seen in the period from 1999-2002 when Germany’s economy fell into a deep slump and the Neuer Markt for hi-tech stocks collapsed. This is a dramatic revision since the bank’s previous forecast was 0.85. “Euro downside remains our top conviction view,” it said.
Goldman Sachs said the European Central Bank is still reluctant to buy sovereign bonds and launch full-blown quantitative easing but is likely to act more aggressively than markets expect when it finally does.
On an inverted basis, UK exchange rate would be €1.54 to the pound by 2017. This turn would Europe into a cheap region for holidays once again, and offer bargain basement prices for farmhouses in Tuscany or Aquitaine.
Yet such a dramatic rise in sterling cannot easily be justified by the underlying weakness of the British economy, which already has the worst current account deficit in the developed world. It was running at 5.2pc of GDP in the second quarter.
While part of this deficit is due to the economic relapse in the eurozone, it also suggests that the exchange rate is badly overvalued even at current levels. The International Monetary Fund estimates that the pound is 5pc to 10pc too strong.
The exchange rate follows the divergence in Interest rates
Cumulative inflation in the UK has been much higher than in the eurozone, without any improvement in relative productivity. A return to the euro-sterling exchange rate of fifteen years ago would imply a massive overvaluation, and could push the UK deficit towards 7pc of GDP.
“The current account deficit is probably the worst in history,” said David Bloom from HSBC.
“We have only three problems with sterling: cyclical, structural, and political; and we don’t really believe in this recovery.”
“We think that whatever infects the eurozone also infects Britian. They feed into each other and that is why we think sterling will go down with the euro. The dollar is the only rose between these two thorns,” he said.
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Euro/Sterling rate for the last 20 years
The Goldman Sachs forecasts were contained in its predictions for 2015, a list that includes a “New Oil Order” as extra crude supply from Libya, Iraq, and Iran pushes prices even lower.
The bank said the US Federal Reserve will not raise rates until September of next year, later than the markets expect. But it will then move faster and on a steeper trajectory than widely assumed as it tries return to a “neutral” rate of 4pc. The report insists that this will be “manageable” for the world, invoking the curious argument that bond tapering has so far been benign and that Fed tightening will therefore continue to be so in the future.
The analysis of Fed policy almost certainly reflects the broad outlook of William Dudley, a Goldman Sachs economist before he became head of the New York Fed. He is one of the most influential figures on the voting committee. Mr Dudley’s views have tended to prevail over recent meetings and are tracked closely by analysts.
The latest Fed minutes played down concerns about the strength of the dollar, suggesting that the closed nature of the US economy makes it resilient against an exchange rate shock.
Goldman Sachs said the US economic expansion has “several years to run” and will drive another long phase of global growth.
The S&P 500 index of Wall Street stocks will rise to 2,300 by 2017, the Stoxx Europe 600 index will rise to 440, and the Japanese Topix wil hit 1,900, so bask in sunlit uplands and enjoy. Gold will go nowhere.
On an inverted basis, UK exchange rate would be €1.54 to the pound by 2017. This turn would Europe into a cheap region for holidays once again, and offer bargain basement prices for farmhouses in Tuscany or Aquitaine.
Yet such a dramatic rise in sterling cannot easily be justified by the underlying weakness of the British economy, which already has the worst current account deficit in the developed world. It was running at 5.2pc of GDP in the second quarter.
While part of this deficit is due to the economic relapse in the eurozone, it also suggests that the exchange rate is badly overvalued even at current levels. The International Monetary Fund estimates that the pound is 5pc to 10pc too strong.
The exchange rate follows the divergence in Interest rates
Cumulative inflation in the UK has been much higher than in the eurozone, without any improvement in relative productivity. A return to the euro-sterling exchange rate of fifteen years ago would imply a massive overvaluation, and could push the UK deficit towards 7pc of GDP.
“The current account deficit is probably the worst in history,” said David Bloom from HSBC.
“We have only three problems with sterling: cyclical, structural, and political; and we don’t really believe in this recovery.”
“We think that whatever infects the eurozone also infects Britian. They feed into each other and that is why we think sterling will go down with the euro. The dollar is the only rose between these two thorns,” he said.
.
Euro/Sterling rate for the last 20 years
The Goldman Sachs forecasts were contained in its predictions for 2015, a list that includes a “New Oil Order” as extra crude supply from Libya, Iraq, and Iran pushes prices even lower.
The bank said the US Federal Reserve will not raise rates until September of next year, later than the markets expect. But it will then move faster and on a steeper trajectory than widely assumed as it tries return to a “neutral” rate of 4pc. The report insists that this will be “manageable” for the world, invoking the curious argument that bond tapering has so far been benign and that Fed tightening will therefore continue to be so in the future.
The analysis of Fed policy almost certainly reflects the broad outlook of William Dudley, a Goldman Sachs economist before he became head of the New York Fed. He is one of the most influential figures on the voting committee. Mr Dudley’s views have tended to prevail over recent meetings and are tracked closely by analysts.
The latest Fed minutes played down concerns about the strength of the dollar, suggesting that the closed nature of the US economy makes it resilient against an exchange rate shock.
Goldman Sachs said the US economic expansion has “several years to run” and will drive another long phase of global growth.
The S&P 500 index of Wall Street stocks will rise to 2,300 by 2017, the Stoxx Europe 600 index will rise to 440, and the Japanese Topix wil hit 1,900, so bask in sunlit uplands and enjoy. Gold will go nowhere.
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