Base case is that pound is fairly valued
Goldman Sachs sees a 30% chance that Brexit negotiators fail to reach a deal and that's a scenario that would send cable quickly to 1.15 and EUR/GBP to 1.00.
Perhaps the more-important part of the report is the Goldman model for viewing a successful or failed negotiation. They say the goal for the UK is to maintain the current trading relationship during the transition.
"The key question for the market is whether or not the UK government successfully achieves a deal with the EU that triggers the status quo transition period after March 2019," Goldman Sachs economists write in a report.
If the agreement results in something close to the base case (some kind of Canada-plus deal), they expect a rise in GBP against EUR and USD of around 5%. That would boost cable to about 1.35 from 1.2870 currently. The rise would be predicated on a removal of the uncertainty that's dogged the UK economy since the Brexit vote.
Goldman Sachs also highlights two areas to watch. The first is the current account deficit, which was 3.4% of GDP in the most-recent reading. They don't see any further fall in GBP necessary to bring it back into balance. The second channel is productivity but they argue that a fall in long-run productivity is already priced in.
The report was published Saturday and didn't take into account the comments from Barnier dismissing the Chequers proposal, which is similar to Goldman's base case. That said, Barnier's comments may simply be posturing.
Overall, they see trading opportunities on both sides.
"In the absence of material news we would be inclined to short EURGBP above 0.90. Moreover, for investors who see lower odds of a "non-deal" outcome, there may be a case for sterling length already," the report says.
