Pound Sterling has remained relatively resilient in recent weeks, with the GBP to USD trading around 1.34 despite rising political uncertainty ahead of next week’s Makerfield by-election.
Goldman Sachs believes the risks posed by a potential Labour leadership contest involving Greater Manchester Mayor Andy Burnham are largely already reflected in Sterling.
The bank notes that prediction markets now see a Burnham-led government as more likely than not by the end of the year. Even so, it argues that shifts in political expectations have tended to weigh on the Pound only in short bursts rather than creating a sustained headwind.
According to Goldman Sachs, political risk premiums embedded in Sterling remain relatively modest. To generate a more significant negative impact, markets would likely need either concrete policy proposals that raise concerns about the UK’s fiscal trajectory or a prolonged increase in political uncertainty.
The bank nevertheless expects broader economic and market factors to remain the dominant drivers of Sterling performance.
In particular, Goldman Sachs argues that developments in energy markets are likely to be more important than domestic politics. The ongoing Middle East conflict and associated energy supply risks have been a significant headwind for the Pound.
The bank believes Sterling could emerge as one of the strongest-performing major currencies if tensions ease and energy market conditions improve. In that scenario, an improvement in the UK’s terms of trade would likely outweigh any additional political risk premium.
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