Sterling down for third day before Conservative Party election outcome

Pound has has depreciated 11 weeks out of the past 12 against the dollar

Sterling fell for the third straight day on Tuesday, dragged down by a firmer dollar and concern that the new prime minister, whose identity will be known later in the day, will pull Britain out of the European Union with no trade deal in place.

The result of the Conservative Party election will be announced just after 10.00 am, with Brexiteer Boris Johnson widely expected to have beaten foreign minister Jeremy Hunt. The winner will become prime minister on Wednesday.

Mr Johnson has declared that the October 31st Brexit deadline is set in stone and Britain will leave the EU then even if no transitional trading arrangements are in place.

That belligerent tone has taken sterling 2 per cent lower against the dollar this month, it has depreciated 11 weeks out of the past 12.


However, given Mr Johnson is 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.

Also a slew of ministers who disagree with Mr Johnson's hard Brexit stance, including chancellor Philip Hammond are expected to resign, which should pressure the pound lower.

Options markets appear to be relatively calm about the announcement, though overnight implied sterling volatility has risen to a one-month high around 8.3 vols.

"News of Johnson becoming the next prime minister is unlikely to move sterling. Markets will be looking to see how much he is genuinely prepared for no-deal Brexit. He has said it's 'do or die' but the question is how reliable is that promise," said Mizuho strategist Colin Asher.

“We are in sort of phony war period, he can get on with Brexit preparations but the real action will happen when parliament reconvenes after the summer break.”

The pound fell 0.3 per cent versus the dollar by 7.45 am at $1.2441, 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 per cent at 89.97 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.

Sterling has also come under pressure in recent weeks from signs the Bank of England may backtrack on its earlier policy tightening signals.

Michael Saunders, a policymaker who has talked in recent months about the likely need for higher borrowing costs, was quoted as saying by Bloomberg that Brexit might stop the BOE from raising interest rates.

- Reuters