John Fahey: Risks of UK stagflation appear to hinder further gains for sterling

Continued rate increases amid a stagnant or contracting economy, alongside elevated levels of inflation, tend to play out negatively for a currency

Sterling has benefitted from widening interest rate differentials, as the Bank of England continued to hike interest rates.

One of the biggest surprises over the first half of 2023 has been the strength of sterling, the currency having made gains against other major currencies, including the dollar and the euro. 

The magnitude of the gains has been in the order of 4% to 5%, which is reflected in the pound having fallen to 88 pence and then for it to trade at near to 85 pence since mid-June.