The pound has mostly traded sideways in a 10% range since the infamous EU referendum in June 2016. 

The UK appears to have the biggest stagflation threat of the major nations, a possible return to 1970s-style militancy, political uncertainty surrounding the PM’s position, Brexit tensions with the EU over the Northern Ireland protocol, plummeting trade; and much more.

The pound has mostly traded sideways in a 10% range since the infamous EU referendum in June 2016. That’s quite a narrow range. The dollar, for instance, has traded in a 15% range over the same period. And while the pound has weakened just recently, it appears quite modest given some of the factors listed above.

In terms of the stagflation threat, the Bank of England has pretty much rubber-stamped this idea with forecasts that inflation will rise to 11% or more later this year and that GDP will fall 0.25% next year. Of course, it could just be proving more honest about the risks than other central banks, but the UK is in the worst position here as it struggles with EU-style vulnerability to higher energy prices resulting from the conflict in Ukraine, and US-style labour market tightness.

On the latter, we’ve just seen over 50k rail workers take their first day of strike action this week. There will be more to follow with threats that other sectors of the economy could see similar industrial action. In time, Mr. Steve Barrow, Head of Standard Bank G10 Strategy, suspects that pay tensions could creep into much of the EU as well, but, for now at least, the UK easily faces the biggest threat on this front, especially compared to the US.

In politics, tomorrow will see two byelections in the UK, with defeat for the Conservatives (which currently hold both seats) likely to lead to further pressure on PM Johnson not long after 41% of his own MP’s expressed no confidence in him in a recent vote. It appears that delivering Brexit – as Johnson promised in the 2019 election – might not be enough to save his skin. But that’s not too surprising when Brexit appears to be responsible for much of the inflation pressure that we see in the UK, and to which the BoE has responded so meekly.

Another nail in the coffin of Brexit triumphalism from the Conservatives could come if the PM decides to revoke parts of the Northern Ireland protocol; something the government keeps threatening to do. Breaking an international agreement with the EU won’t go down well abroad, particularly with the US, and could leave the UK more isolated as a result – and sterling at greater risk. But whether the protocol is changed or not, there’s no getting away from the fact that trade performance is really poor, even if not all of this is down to Brexit.

In short, there seems to be a plethora of reasons to think that the pound should really be on its knees by now. But it is not. Why is this? Possibly because bearish positioning in the pound already seems pretty extreme. If everyone is bearish, there may be few things left to sell. Another factor is that the pound is already cheap. If you believe that exchange rates move over time to compensate for inflation differences, then sterling/dollar should be heading for the 1.40s.

"We could also spin some of the earlier arguments to defend the pound." For instance, if PM Johnson seems to be pulling the Conservatives down, then it might be in the pound’s best interests that he goes. While, on industrial action, many in the UK remember the belligerent attitude the Thatcher-led Conservative government took in the 1980s to the militancy of the s; something that many argue broke power and ushered in lower inflation and stronger growth as a result. A similar put-down for rail s and others today could be seen as a re-run of events forty years ago. So, it might not all be doom and gloom and indeed, from our perspective, we see only modest sterling weakness from here to the 1.15-1.20 range against the dollar, which would fit the rather subdued trading ranges that we have seen for the pound in recent years", said Mr. Steve Barrow.