The Bank of England's (BoE) broad trade-weighted sterling index is now barely 3% away from the levels traded in June 2016, before the Brexit vote. Some are no doubt making the case that this is a removal of the Brexit risk premium in sterling, aided by new Prime Minister Keir Starmer's desire to engage more closely with Europe, FX strategist at ING Chris Turner notes.

Close to pre-Brexit vote levels

“While we have some sympathy with that view, we ascribe sterling strength more to sticky UK inflation and the limited pricing of BoE rate cuts this year, plus July's drop in the dollar on the back of softer US price data.”

“According to our medium-term fair value models, we see GBP/USD as fairly priced (i.e., not significantly undervalued) and we see fund managers reaching the same conclusions in buy-side investor surveys too.”  

“We are still officially looking for three BoE rate cuts this year (versus two currently priced) and when the UK data allows it, we think sterling will come lower. The 1 August MPC rate meeting will also be the first big opportunity since the UK election to hear what the BoE are really thinking. We see this as a downside risk to sterling too.”