Pound down for third day before Conservative Party election outcome

Tuesday,   23-Jul-2019   03:35 PM (IST)

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. 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.