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Goldman Sachs Group Inc. is the latest Wall Street bank to bet on a pound rally in 2020 as it sees next month’s U.K. elections as a pathway to resolving Brexit.
Sterling will likely appreciate against the euro while U.K. government bonds slide as progress on Brexit after the Dec. 12 vote could remove investment uncertainty and also unleash more public spending, strategists at Goldman said in its ‘Best Trade Ideas Across Assets’ note. That view echoes peers such as Bank of America Merrill Lynch and Morgan Stanley.
“Our economists think a victory for the Conservative Party in next month’s election would likely result in a fairly swift resolution of the Brexit process, as well as more expansionary fiscal policy,” strategists, including Zach Pandl and George Cole, wrote in a note dated Nov. 21. Clarity on Brexit makes sterling “our preferred G-10 FX long” for the first quarter of 2020, they said.
Goldman predicts the pound will rally more than 4% from current levels and targets 82 pence per euro, seeing all of this move happening in the first three months of 2020. Since there will still be doubt on the next stages of Brexit, given the risk of protracted talks on the future trade relationship between the U.K. and European Union, it recommends making the bet in the options market.
The pound traded around 85.90 pence to the euro on Friday, having gained more than 3% against the common currency this quarter to be the best-performing major currency. Against the dollar, it has climbed nearly 5% since the end of September to trade around $1.29.
The New York-based bank is also expecting U.K. sovereign bonds, which have acted as a haven from Brexit risk, to weaken. That will take 10-year gilt yields “sharply higher” with its target at 1%, a level not seen since May 2019 and about 30 basis points above current levels.
“We think the U.K. offers the most attractive shorts in G-10,” the Goldman strategists wrote.
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