Signs of Brexit risk-premium apparent in pound, Goldman says

Sterling could be set for a very sharp fall if Britons decided to leave the European Union and signs had already appeared that investors were beginning to price-in such a scenario, Goldman Sachs said.

Although an exit of the UK from the EU was not the broker´s 'base case', the country´s still-elevated current account deficit might see the pound lose up to between 15%-20% of its value.

Britain´s current account deficit would be a source of potential weakness despite its recent improvement to 3.7% of gross domestic product, Goldman Sachs added.

In rough terms, and if the exchange rate were the sole adjustment mechanism for the current account deficit, then the trade-weighted pound could fall by 15-20%, which would take 'cable' to about 1.15-1.20 and euro/gbp to approximately 0.90-0.95.

On the other hand, if there was a larger adjustment in the UK´s domestic demand then the fall in sterling could be smaller, it said.

The recent move in the pound versus the dollar had been "somewhat consistent" with movements in rates and risk sentiment but there was an "unexplained residual [movement]" that could not be accounted for by shifts in interest rate differentials.

Nevertheless, Goldman Sachs continued to expect the UK to stay inside the EU and cyclical strength in the economy to eventurally re-send euro/GBP back below 0.70.

In 12 months´ time, Goldman´s forecasts were for euro/gbp to be at 0.68 and gbp/usd at 1.40.