Pound Rally Can Run, Goldman Says, If Brexit Hurdles Are Cleared

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(Bloomberg) — So-called tunnel negotiations between the U.K. and the European Union over Brexit would be enough to power higher, according to Goldman Sachs Group Inc (NYSE:).

While the pound weakened Monday after EU negotiators said U.K. plans needed more work, the drop only took back a slice of last weeks’ 2.7% rally, its best in over two years. It has the potential to extend gains as far as $1.30, the Wall Street bank said in a note to clients on Friday. Sterling fell 0.8% to $1.2573 as of 7:51 a.m. London time.

“If the two sides do make more progress toward a deal, continued short-covering from real money investors should prolong the rally,” said analysts including New York-based Zach Pandl, Goldman’s co-head of global foreign-exchange and emerging-market strategy. “We think sterling has further to run, and reiterate our trade recommendation to go long GBP/USD with an initial target of 1.30.”

Goldman expects that if the EU and Prime Minister Boris Johnson agree on a deal this week, enough U.K. lawmakers will back it to ensure an orderly Brexit at the end of October.

After meeting with his British counterpart Stephen Barclay on Friday, the EU’s chief Brexit negotiator Michel Barnier told ambassadors from the EU’s remaining 27 member states that there has been enough progress for discussions to intensify.

But the EU stopped short of taking the talks into the “tunnel” — the formal Brussels process by which the actual legal text of an agreement is thrashed out in secret. Instead, the diplomats said they would reconvene early this week for a progress update.

And while Johnson told his Cabinet on Sunday that a Brexit deal is achievable, Barnier told a meeting of envoys on Sunday that the U.K.’s proposals for breaking the deadlock over the Irish border lacked detail and risked leaving the single market vulnerable to fraud.

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