Short-term rebound of the British Pound Conceals Long-term Concerns, Goldman Sachs Warns: Fiscal Difficulties Will Continue to Drag Down the Exchange Rate

The GBP foreign exchange market has recently shown a complex situation. On December 3, the GBP/USD rose by 1.08% to 1.3350, hitting a recent high, while the EUR/GBP fell to 0.8737, also reaching a monthly low. The main drivers behind this rally are the weakening US economic data and the increasing expectations of Fed rate cuts.

However, institutional analysts generally warn that the short-term rebound is only superficial. Recent views from Goldman Sachs and Deutsche Bank indicate that the fundamental pressures on the pound have not improved in the long term.

Weakening dollar releases room for a rebound; budget announcement eases near-term concerns

US November ADP employment data unexpectedly declined, and market expectations of a policy shift by the Federal Reserve increased, suppressing the dollar’s performance. Meanwhile, after the UK government budget announcement, market concerns over UK debt were temporarily alleviated, leading to a technical rebound in the pound. Ebury strategists pointed out, “The elimination of budget uncertainties may provide space for the pound to rebound before the end of the year.”

The latest report from the Organisation for Economic Co-operation and Development (OECD) further supports this short-term optimism. The organization expects the Bank of England to cut interest rates twice more before June next year, with rates eventually lowered to 3.5%. At the same time, OECD also revised upward the UK economic growth forecast, raising the 2026 estimate from 1% in September to 1.2%, with a 2027 growth forecast of 1.3%. UK Chancellor of the Exchequer Jeremy Hunt welcomed this, claiming that UK economic growth will surpass expectations.

Fiscal tightening and monetary easing create a double squeeze; institutions collectively turn bearish on long-term prospects

However, optimistic expectations cannot hide underlying risks. Deutsche Bank bluntly stated that the UK’s predicament is far from resolved. The bank pointed out that UK spending could increase significantly over the next two years, which will inevitably trigger austerity measures, making the UK budget problem a long-term challenge that is difficult to solve. Without fundamental solutions, negative news will continue to impact the pound.

Goldman Sachs’s outlook is even more pessimistic. The bank believes that fiscal constraints remain the primary challenge for the pound, especially relative to other European currencies within the G-10 group. Additionally, concerns about the UK labor market are rising, posing risks of further rate cuts. Goldman Sachs summarized, “The combination of fiscal austerity and monetary easing will negatively impact the pound, especially relative to other European currencies.”

Exchange rate outlook adjustments; euro continues to strengthen against the pound

Based on the above assessments, Goldman Sachs has raised its euro-to-pound exchange rate forecast. The bank expects the euro to be 0.89 against the pound in three months, 0.90 in six months, and further up to 0.92 in one year. This reflects institutional expectations of a long-term depreciation of the pound.

In the context of increased volatility in global forex markets, emerging market currencies such as the Philippine peso are also under pressure, highlighting the deeper logic of exchange rate divergence among developed economies. The short-term technical rebound of the pound may continue until the end of the year, but in the long term, structural fiscal issues in the UK and the shrinking policy space of the central bank will continue to exert pressure on the exchange rate.

Investors should exercise caution when trading the pound and not interpret recent rebounds as signals of a trend reversal.