Is the British Pound Facing a "Long-Term Dilemma"? Goldman Sachs Warns: Fiscal Pressure Could Become the Next Concern

According to the latest news on the British pound, despite a recent short-term rebound against the US dollar, institutions generally remain bearish on its long-term trend. Goldman Sachs explicitly states that the UK’s fiscal constraints will continue to be a core factor putting pressure on the pound.

The “Illusory” Nature of the Short-Term Rebound

During trading on December 3rd, the GBP/USD rose to 1.3350, hitting a one-month high with a gain of 1.08%. Meanwhile, the EUR/GBP declined by 0.63% to 0.8737, touching a monthly low.

This short-term upward movement was driven by a weakening dollar. US November ADP data underperformed expectations, and market anticipation of a dovish stance from the new Federal Reserve Chair reignited expectations of rate cuts, weighing on the dollar. Additionally, market sentiment eased after the UK announced a new budget, providing room for the pound to rebound.

Ebury strategist comments, “Eliminating budget uncertainties could provide space for the pound to rebound before the end of the year,” but whether this respite can last remains uncertain.

Economic Data Looks Positive, but Structural Concerns Persist

A recent report from the Organisation for Economic Co-operation and Development (OECD) brought positive news for the UK economy. The organization forecasts that the Bank of England will implement two more rate cuts by June next year, lowering rates to 3.5%. At the same time, OECD has raised its UK economic growth forecast, increasing the 2026 growth rate from 1% to 1.2%, and predicting a 1.3% growth in 2027.

UK Chancellor of the Exchequer Jeremy Hunt welcomed these forecasts, claiming that UK economic growth will surpass expectations. However, behind this optimism, the latest news on the pound reflects not only bright prospects.

Diverging Views: Short-Term Bullish, Long-Term Bearish

Despite signs of a short-term rebound, heavyweight institutions like Goldman Sachs and Deutsche Bank remain pessimistic about the pound’s long-term outlook.

Deutsche Bank believes the pound has not yet escaped its difficulties. The bank points out that UK spending will increase significantly over the next two years, followed by inevitable austerity measures. “UK budget issues will become a long-term challenge, and related negative news may continue to surface.”

Goldman Sachs’s view is more direct. The bank emphasizes that fiscal constraints in the UK remain the main challenge for the pound, especially relative to other G-10 European currencies. More critically, risks in the UK labor market are intensifying, adding additional downward pressure on interest rates.

Goldman Sachs summarizes, “The combination of fiscal tightening and monetary easing in the UK will negatively impact the pound, especially relative to other European currencies.” Based on this assessment, Goldman Sachs has raised its EUR/GBP forecast: expecting 0.89 in three months, 0.90 in six months, and further climbing to 0.92 in one year.

Implications of the Latest News on the Pound

While the short-term rebound is encouraging, the UK’s fiscal and labor market challenges remain unresolved. This suggests that the pound’s upward potential may be limited, and downside risks are brewing.