Investors bet against pound over ‘dire’ threat of stagflation

Investors are lining up bets that the pound will fall further after a tough start to 2022 as a “dire” mix of towering inflation and slowing growth darkens the UK’s economic outlook.

Wagers that sterling will fall are near their highest level in almost three years, according to Commodity Futures Trading Commission data, which track how speculative investors are positioned in futures contracts, a proxy for sentiment in the $6.6tn-a-day foreign currency market.

Even as Boris Johnson survived a parliamentary confidence vote this week — potentially averting a period of political turmoil — markets are focused on the gloomy economic backdrop, say analysts, meaning the UK prime minister’s victory is unlikely to prompt a change in course for the currency.

Sterling whipped back and forth around Monday’s vote, but on Thursday traded close to where it was against the US dollar a week ago at $1.254. It has shed 7 per cent this year against the dollar.

Currency traders say the implications of Johnson’s win were muddied by uncertainty over who might have replaced him. At the same time, the political twists and turns largely remain a sideshow for a foreign exchange market focused on the potential for a UK recession later this year, which could halt the Bank of England’s efforts to tame inflation by raising interest rates.