×

Goldman Sachs: Brexit will put the kibosh on sterling’s post-Trump rally

The surprise outcome of the U.S. presidential election may have spurred a rally in Britain's pound, but that's not likely to last long, Goldman Sachs said in a note on Monday.

"The U.S. presidential election's outcome has been positive for the British pound, which appreciated even against the U.S. dollar. But, the election of Mr. Trump has not changed our bearish view on sterling," it said, sticking with a forecast for the pound to fall to $1.20 by year end, with the euro fetching 90 pence.

"The recent appreciation of sterling makes the entry point into a short pound trade more compelling," it said, adding the fallout from Brexit will be "extensive."

The pound climbed to as high as $1.2673 in the wake of President-elect Donald Trump's surprise win in the U.S. election, from levels under $1.24 before the results. The pound was fetching $1.2470 at 2:02 p.m. HK/SIN.

Sterling's strength against the greenback came even as the dollar index, which measures the U.S. currency against a foreign-exchange basket, rose to its highest in 11 months.

The euro was fetching 86.16 pence at 2:07 p.m. HK/SIN, down from levels above 89 pence before the results.

The pound likely strengthened due to expectations that Trump could pursue a "fast-track" trade deal with the U.K., Goldman noted.

But it added, "at this stage, we have no reliable information on the stance that the new U.S. administration will have vis-a-vis Brexit." It noted that the U.K. would be unable to sign a trade deal with the U.S. until it formally left the EU.

To exit the EU, the U.K. must invoke Article 50 of the treaty, which starts a two-year negotiation period for the terms of the separation process.

Chris Ratcliffe | Bloomberg | Getty Images

"The political uncertainty linked to the process of leaving the EU and renegotiating trade agreements is and will likely remain elevated for long," it said. "The process has not even begun and, when Article 50 is triggered, uncertainty is set to increase even more: for some time it will remain unclear what kind of deal the EU and the U.K. will agree upon."

Goldman expected Brexit would spur an economic slowdown as the uncertainty reduces investment, employment and consumption.

It noted that the U.K. legal case currently underway could make the road to Brexit even more complicated and it was likely to increase sterling's volatility over the next 12 months.

The U.K.'s Supreme Court was likely to rule next year on whether the government needed parliamentary approval before invoking Article 50, Reuters reported earlier this month.

That followed a decision by a lower court, the High Court of England and Wales, in early November that parliament had to make the decision, Reuters reported. That ruling had helped to support the pound.

But Goldman remained pessimistic of the likely outcome.

"Even if the case could delay the date on which Article 50 is triggered, we believe the decision increases the likelihood of a general election in 2017 and of a stronger 'pro-hard Brexit' Parliament thereafter," it said. "The road to 'hard Brexit' negotiations has become bumpier, but has not been blocked. Nevertheless, the level of overall uncertainty around the process has increased."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Follow CNBC International on Twitter and Facebook.