Pound down for third day before Conservative Party election outcome

Reuters , Tuesday 23 Jul 2019

Sterling fell for the third straight day on Tuesday, dragged down by a firmer dollar and concern that Britain's new prime minister will pull the country out of the European Union with no agreement in place to smooth the transition.

The result of the ruling Conservative Party's leadership election will be announced at 1045 GMT, with Brexit figurehead Boris Johnson widely expected to have beaten current foreign minister Jeremy Hunt. The winner is set to become prime minister on Wednesday.

Johnson has declared that Britain will leave the EU on the latest Oct. 31 Brexit deadline even if no transitional arrangements are in place.

Investors will be watching closely to see how many ministers unhappy with a Johnson government will resign, as well as the make-up of his cabinet.

Two junior ministers have already quit over Johnson's plans, and finance minister Philip Hammond and justice minister David Gauke have both said they plan to resign before they are sacked.

Johnson's belligerent tone has taken sterling 2% lower against the dollar this month, and it has depreciated in 11 weeks out of the past 12.

But with Johnson the overwhelming favourite to win the contest, a big sterling move after the announcement is seen as unlikely, with greater focus on the new prime minister's first speech in office and cabinet appointees.

"News of Johnson becoming the next prime minister is unlikely to move sterling. Markets will be looking to see how much he is genuinely prepared for no-deal Brexit. He has said it's "do or die" but the question is, how reliable is that promise?" said Mizuho strategist Colin Asher.

"We are in sort of a phoney war period, he can get on with Brexit preparations but the real action will happen when parliament reconvenes after the summer break."

Options markets appear to be relatively calm, though overnight implied sterling volatility has risen to a one-month high around 8.3 vols.

The pound fell as much as 0.5% versus the dollar to $1.2418 , heading back towards recent two-year lows of $1.2382, battered also by a surge in the dollar.

Against the euro it was down 0.2% at 90.045 pence .

Recent weeks have seen investors sharply cut back on sterling positioning, with short positions growing to a 10-month high in the latest week, based on Commodity Futures Trading Commission data.

Former Johnson advisor Gerard Lyons, who according to betmaker Betway is now the favourite to become the next Bank of England governor, said in an opinion piece for the Financial Times on Tuesday that the central bank should revisit its 2% inflation target

Sterling has come under pressure in recent weeks from signs the BoE may backtrack on its earlier policy tightening signals.

Policymaker Michael Saunders, who has talked in recent months about the likely need for higher borrowing costs, was quoted as saying by Bloomberg that Brexit might stop the BoE from raising interest rates.

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