Synopsis:

Goldman Sachs observes recent Sterling weakness driven by shifting dynamics, including fiscal risks and disappointing domestic data. While global factors suggest conditions for Sterling pressure later in 2025, the near-term risk-reward for directional trades involving cross/Sterling positions appears less compelling.

Key Points:

• Recent Sterling Performance:

  • GBP has been the weakest G10 currency for two consecutive weeks.
  • Initial weakness stemmed from rising fiscal risk premiums due to global yield increases.
  • More recent pressures reflect downside surprises in domestic growth and inflation data.

• Current Market Dynamics:

  • Limited negative reaction to recent UK inflation and GDP data reflects:
    1. Support Factors: Outperformance in long-end Gilts, relaxing immediate fiscal concerns.
    2. Pressure Factors: Negative currency response to lower front-end yields.
  • A decline in long-end Gilt yields may restore a more typical positive correlation between Sterling and rate differentials.

• Upcoming Key Risk Event:

  • November UK labour market report on Tuesday will be critical.
  • Focus on the impact of the budget’s National Insurance hike on labour demand.

• Broader Considerations:

  • UK fiscal premium, weaker data trajectory, and potential tariff impacts contribute to a wider distribution of two-way risks.
  • Sterling remains vulnerable to further global duration sell-offs.

Conclusion:

While the long-term outlook suggests Sterling pressure due to global factors and tariff risks, the near-term landscape is marked by conflicting influences. Goldman Sachs sees limited risk-reward for directional cross/Sterling trades at present, recommending caution amid a broadening range of risks.