Forex Flash: GBP weakness is sufficient for UK reshuffle – Goldman Sachs

FXstreet.com (Barcelona) - To determine the real exchange rate adjustment required to address the UK’s external imbalances, we use a framework that we have previously used to analyze the adjustments taking place within the Euro area. According to the Economics Research Team at Goldman Sachs, “In this framework, the size of the exchange rate adjustment required to rebalance the economy depends (in part) on the ease with which demand can switch to domestically produced goods and services. If one assumes that the relative price changes required to trigger such a switch are broadly consistent with past patterns, our results suggest that Sterling is now weak enough to rebalance the UK economy.”

However, if the reallocation of resources required to meet the shift in demand to UK-produced output continues to be impeded by the weakness of credit supply, Sterling will need to fall further to rebalance the economy.