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"A wide range of policy outcomes and cyclical factors support further underperformance," of Pound Sterling, warns Goldman Sachs.
Analysts at one of Wall Street's most important banks tell clients the pound will continue to underperform the euro over the coming 12 months, driven by a combination of Bank of England interest rate cuts and concerns about the UK government's debt outlook.
In a research note released on the day the Labour Party conference starts, Goldman Sachs analysts warn that a "renewed focus on fiscal risks heading into the Autumn budget on November 26th coupled with concerns on the Labour Party conference newsflow" has temporarily weighed on UK monetary assets such as gilts and the pound.
Although analysts see risks to the pound stemming from current policy, they note that as of yet, there is nothing dramatic akin to the fallout of the Liz Truss mini-budget pinging on the radar. Instead, the currency faces a slow and steady grind lower over the course of the next year.
The latest research update comes as UK ministers are said to be putting pressure on UK Chancellor Rachel Reeves to boost spending at a time when she has to find savings and tax rises to the tune of £30BN to plug an existing gap in her budget.
However, markets will be becalmed by news the Labour government could be willing to break its manifesto pledge to not increase income tax, value added tax or national insurance rates.
These 'big lever' taxes could make plugging the budget gap a lot easier for the Chancellor to meet her fiscal rules, which will placate the market and ease fiscal risks facing the pound.
Nevertheless, Goldman Sachs says GBP underperformance is to stay intact:
"We still see a sufficiently broad range of factors to support further Sterling underperformance versus European peers from here. Vulnerabilities in the UK labour market, the need for further fiscal consolidations at the Autumn budget, global cyclical risks, and a challenging structural valuation picture still point to a gradual drift higher in EUR/GBP from here in our view."
Regarding the central bank outlook, Goldman thinks the Bank of England will now forgo a November rate cut on account of the UK's sticky inflation.
However, economists expect as many as four quarterly cuts, starting at the February meeting next year, making for a more aggressive path of cuts than the market currently expects, and also suggests the Bank of England will 'outcut' the European Central Bank.
If interest rates are to play a role in the GBP's outlook in 2026, then such a path of cuts would likely weigh on the currency relative to the euro.
Altogether, Goldman Sachs holds a 12-month forecast for EUR/GBP of 0.90. This gives a pound to euro target of 1.11.