An extension to the Brexit process will be good news for the pound as it opens the door for a closer relationship with the European Union, according to Goldman Sachs Group Inc.
Sterling could rally toward 80 pence per euro, a level not seen since the vote to leave the EU in 2016, should a move to prolong the Brexit deadline pave the way for “softer outcomes,” the U.S. bank wrote in a note. These include a customs union, single market membership or a second referendum, it said.
“We remain of the view that the pound is due for a ‘deal dividend’ once the U.K. moves into the lengthy transition period on its way out of the EU,” wrote George Cole, a strategist at Goldman. “Our models suggest euro-pound still embeds a Brexit-related premium of around 5 percent.”
Sterling has borne the brunt of the ebbs and flows surrounding Prime Minister Theresa May’s efforts to secure a Brexit deal, which Parliament rejected Tuesday. Lawmakers are voting Wednesday on a no-deal exit on March 29, and if that is rejected then voting Thursday on extending the Article 50 deadline. Goldman sees a short extension to late May or early June as most likely.
There are still risks remaining, including the growing possibility of a general election, according to Goldman. A no-deal scenario could see the euro reach parity with the pound, it added.
Advertisement