Pound up vs weaker dollar as Johnson faces confidence vote

By Lucy Raitano

LONDON (Reuters) -The British pound rose on Monday against a broadly weaker dollar, hours before Prime Minister Boris Johnson was due to face a confidence vote called by members of his Conservative Party.

Johnson is seen surviving the vote which was called after a growing number of lawmakers in the governing Conservative Party questioned the British leader’s flagging authority over the “partygate” scandal, which led to police fines for gatherings that broke COVID-19 lockdown rules.

Vasileios Gkionakis, head of currency strategy at Citi attributed Monday’s pound strength partly to the weaker dollar, which has come under pressure as other central banks, including the European Central Bank flag interest rate rises.

The dollar index is down 0.2%.

“A vote of no-confidence immediately translates into political uncertainty, so we should be seeing sterling under pressure,” Gkionakis said.

“I think the market may be pricing the possibility that if Johnson is removed as the leader, then we may have a shift in UK policy especially in what concerns the fiscal stance.”

At 0826 GMT, sterling was 0.62% higher against the dollar at $1.25690. It rose 0.45% to 85.465 pence versus the euro.

Some other analysts too saw the development as potentially pound-positive, if it allowed a line to be drawn under what’s been dubbed Partygate, and eased uncertainty over Johnson’s threats to scrap post-Brexit agreements regulating goods shipments from mainland Britain to Northern Ireland.

ING Bank analysts noted the pound had been unreactive when the “partygate” scandal first exploded and even the prospect of a leadership change may not have many implications policy-wise.

“That said, the pound remains vulnerable in the short term given worsening growth prospects and a potential re-pricing of BoE rate expectations,” they wrote, adding that a fall below $1.25 could open the way for a decline to $1.2300-$1.2350.

The currency has been under increasing pressure this year, having just wrapped up five straight months of losses, weighed down by Britain’s dismal growth outlook which is casting doubt on the Bank of England’s rate-hike trajectory.

Citi’s Vasileios Gkionakis noted low household savings ratios and said: “Fiscal policy has not been as forceful as one would have wanted in order to cushion the blow from higher energy prices. I think this is going to be the main driving factor.”

(Reporting by Lucy Raitano and Anisha Sircar; editing by Sujata Rao)