Sterling enjoys a small lift as Boris Johnson quits

LONDON (Reuters) -Sterling held on to its gains on Thursday after Boris Johnson said he was quitting as prime minister following a rush of ministerial resignations and calls for him to go.

The gains versus the dollar and the euro began after media reports of his imminent resignation earlier in the day. But the moves were small, with Johnson’s departure already seen as almost a certainty and largely priced in by markets.

UK assets have largely reacted calmly to Johnson’s declining fortunes this week, with the deteriorating global economic backdrop viewed as far more important even if some immediate political uncertainty has been removed.

Against the dollar, the pound traded at $1.1993 by 1500 GMT, up around 0.6% on the day but below the high of $1.2024 hit before Johnson announced he was quitting.

The pound had hit $1.1877 on Wednesday, its lowest since March 2020.

Versus the euro, sterling extended an earlier rise after the announcement to reach 84.75 pence, up 0.7% on the day and its highest since May 23 .

“Some of the sentiment we’ve seen in markets today is relief that some of the scandals of the past year will be behind us,” Stefan Koopman, senior macro strategist at Rabobank, said.

“But this is mostly on hope because if you look forward it is unclear who will replace him (Johnson).”

The British currency had been sent to two-year lows versus the dollar this week, although analysts say concerns about the health of economies including Britain’s have been a far bigger cause of the selling than the political drama in Westminster.

“Sterling remains vulnerable. The growth outlook is not good and the Bank of England is constrained. I expect a recession in the next few quarters,” Koopman said.

Against the euro, the pound has held up far better. Europe’s single currency has borne the brunt of worries about a recession and the economic fallout from soaring natural gas prices.

“If you look at where the value of the pound at these cheaper levels, we would expect it to go higher from here,” said Gerard Fitzpatrick, global head of fixed income at Russell Investments, citing reduced political uncertainty.

UK stocks were higher, in line with gains internationally. British government bond yields rose, particularly shorter-dated yields, corresponding with increases in euro zone and U.S. debt yields.

Some analysts reckon Johnson’s departure could lead to increased public spending as a new leader and team try to shore up support with populist measures.

That may provide a short-term boost to UK assets but could raise inflationary pressures, with Britain’s economy feeling the pressure of decades-high inflation more than many other countries. [nL8N2YN5FE]

Johnson’s Conservative Party now has to elect a new leader, a process which could take weeks or months, with details to be announced next week.

The pound was also helped by comments from Bank of England rate-setter Catherine Mann on Thursday that central banks should raise interest rates faster to tackle inflation.

(Reporting by Tommy Reggiori Wilkes and Dhara Ranasinghe; Editing by Saikat Chatterjee, Mark Heinrich and Andrew Heavens)