Sterling falls versus dollar on concerns over the economy

By Stefano Rebaudo

(Reuters) – Sterling fell against a strengthening dollar as an unfavourable macroeconomic backdrop overshadowed concerns about politics after Prime Minister Boris Johnson announced his resignation.

The pound rose on Thursday after media reports of his imminent resignation earlier in the day and held on to the gains after Johnson said he was quitting.

Some analysts said they expected a rally as some political uncertainty came off the table.

Johnson announced he would stay on until his successor was chosen.

The Financial Times, citing lawmakers with knowledge of the plans, said the Conservative party intended to have a new prime minister in place by the time parliament returns from its summer break in early September.

“Johnson’s resignation does little to change the macroeconomic reality for the UK, where the toxic mix of rising household costs and slowing growth looks likely to test any future leader,” said Tim Graf, head of EMEA Macro Strategy, State Street.

“Sterling could be better supported in the coming days with the removal of near-term political uncertainty, but I would see rallies as opportunities to sell,” he added.

The pound fell 0.8% to $1.1996. It hit its lowest since March 2020 of $1.1877 on July 6.

According to Chris Beauchamp, chief market analyst at online trading platform IG, a Conservative-run handover of power that would force a snap election through a no-confidence vote in Parliament “isn’t much of a risk”.

Keir Starmer, leader of the main opposition Labour Party, said he would call a parliamentary confidence vote if the Conservatives did not remove Johnson at once.

Sterling was down 0.1% at 84.48 pence after reaching its highest since May 23 of 84.425 in Asian trade on Friday.

The euro dropped to a fresh 20-year low as Europe is exposed to significant risks around energy dependency on Russia, a cost-of-living crunch and fragmentation risks in the single currency area’s bond markets.

“Some are speculating that most potential candidates – with the possible exception of Liz Truss – may have a less hawkish approach to Brexit and the trade relationship with the EU,” ING analysts said.

Concerns about post-Brexit spats with the European Union also weakened the pound several times this year.

A snap YouGov poll found that defence minister Ben Wallace was the favourite among Conservative Party members to replace Johnson, followed by junior trade minister Penny Mordaunt and former finance minister Rishi Sunak.

(Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise)