Sterling falls to fresh two-year low on leadership race concerns

Boris Johnsons resignation as prime minister last week deepened the uncertainty hanging over the British economy, already under strain from an inflation rate heading for double digits, the risk of a recession and Brexit.

Britain‘s main opposition Labour Party will put forward a motion for a no-confidence vote in Johnson’s government on Tuesday, with the vote expected to take place on Wednesday, a source in the party said.

“Sterling will be buffeted by leadership questions as there is a question about the extent to which we will see a conservative leader who is intent on fiscal discipline or a prime minister intent on unfunded tax cuts, which would trigger a more aggressive response from the Bank of England,” said Sarah Hewin, a senior economist at Standard Chartered.

“Until the leadership question is decided, sterling may stay volatile.”

The issue of tax cuts was fast becoming the central battle in the leadership race with nearly all of the candidates promising to cut business or personal taxes. Former Chancellor Rushi Sunak, the early front-runner, however is the only candidate who has played down the prospect of imminent tax cuts.

Aside from politics, weakening economic data is also a factor. Economists expect May GDP data on Wednesday to show no growth, reinforcing expectations of an economic contraction in the second quarter.

Latest weekly positioning data showed a slight increase in short pound bets to $4.2 billion though they remained well below a November 2019 high of $6.3 billion.