* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
LONDON, June 18 (Reuters) - Sterling traders may be getting ahead of themselves in expecting an interest rate increase in August by the Bank of England, according to an analysis by Goldman Sachs.
Michael Cahill, a London-based strategist at the U.S. bank found the “fair value” of the British pound was around $1.26 using a mix of interest rate differentials, global risk appetite, oil prices, terms of trade and perceived sovereign debt risks in the credit default swap spreads.
“With (UK economic) growth for the second quarter, tracking at a meager 0.7 percent annualized, we think markets are over-pricing an August rate hike, which helps inform our bearish view on the currency in the near term,” Cahill wrote in a note.
Sterling has taken a beating over the past two months since economists postponed their forecasts of an interest rate rise from May to August. This followed dovish comments from BoE Governor Mark Carney which, together with downbeat data, prompted a selloff in sterling.
Sterling has stabilised near 2018 lows at $1.3227 after an 8 percent drop since mid-April but bond markets are pricing a 40 percent probability of a rate rise in August.
Expectations of another rate increase over the remainder of the year stand at 80 percent.
The Bank of England is set to unveil its outlook on interest rates at a policy meeting on Thursday, though markets expect no change after a mixed run of recent data.
Goldman’s projection of sterling’s fair value is near the lower-end of the latest Reuters poll this month where a median estimate of more than 50 foreign exchange strategists expected the pound to trade around $1.4050 in a year’s time. (Reporting by Saikat Chatterjee; editing by David Stamp)