Market News

By Naomi Tajitsu and Anchalee Worrachate

• UK currency rises to $1.2872, highest since March, after data
• Goldman Sachs expects pound to hit $1.30 before end of July

(Bloomberg) -- The pound approached a one-year high after a report showed the UK economy grew more than expected, with Goldman Sachs predicting more gains for the currency over the next couple of weeks.

Sterling rose 0.2% to $1.2879, the highest in four months, as the UK economy expanded at twice the pace expected in May after stalling in the previous month. Goldman recommends buying the currency, saying it can climb to $1.30 within two weeks.

The latest moves add to the pound’s outperformance this month, with investors optimistic the newly elected Labour government will bring a period of political calm and a steady approach to the nation’s finances after winning a thumping majority last week. Bets that the Bank of England will take longer to cut interest rates have also supported the currency.

“The UK now has arguably the most stable government in the G7 over the next five years, due to the size of the majority,”  Shahab Jalinoos, global head of FX research at UBS Investment Bank in New York, wrote in a note. “We think the GBP should finally see the tide of structural flows move in its favor for the first time in the post-Brexit-vote era.”

This would keep the pound near 0.8400 per euro in the longer term, he added. The pair traded at 0.8427 on Thursday, with the UK currency hovering near its highest in nearly two years.

Labour May Have the Fix the UK Economy Needs: Mohamed El-Erian

Traders pushed back bets on a rate cut next month after BOE Chief Economist Huw Pill said on Wednesday that the timing of a first reduction is still an “open question,” echoing comments by fellow policymaker Jonathan Haskel earlier in the week. 

Money markets are currently pricing a 45% chance of a BOE cut in August and 45 basis points of easing in total by the end of the year. That’s similar to what’s expected from the Federal Reserve for 2024, meaning the gap between interest rates in the UK and the US is unlikely to widen in the dollar’s favor.

For Goldman, that opens room for the pound to beat the dollar in the short term, reaching the $1.30 level the bank has forecast since at least the start of the year. 

“Being long GBP on crosses over a longer horizon also looks attractive to us, particularly against other ‘risky’ currencies, ” Goldman strategist Karen Reichgott Fishman wrote in a note. 

(Updates prices, adds comment in paragraph four.)