Goldman Sees Pound Rally to Three-Year High If Brexit Delayed

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An extension to the Brexit process will be good news for the pound as it opens the door for a closer relationship with the European Union, according to Goldman Sachs Group Inc.

Sterling could rally toward 80 pence per euro, a level not seen since the vote to leave the EU in 2016, should a move to prolong the Brexit deadline pave the way for “softer outcomes,” the U.S. bank wrote in a note. These include a customs union, single market membership or a second referendum, it said.

“We remain of the view that the pound is due for a ‘deal dividend’ once the U.K. moves into the lengthy transition period on its way out of the EU,” wrote George Cole, a strategist at Goldman. “Our models suggest euro-pound still embeds a Brexit-related premium of around 5 percent.”

Sterling has borne the brunt of the ebbs and flows surrounding Prime Minister Theresa May’s efforts to secure a Brexit deal, which Parliament rejected Tuesday. Lawmakers are voting Wednesday on a no-deal exit on March 29, and if that is rejected then voting Thursday on extending the Article 50 deadline. Goldman sees a short extension to late May or early June as most likely.

There are still risks remaining, including the growing possibility of a general election, according to Goldman. A no-deal scenario could see the euro reach parity with the pound, it added.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Scott Hamilton

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