June 18, 2019 / 8:31 AM / 6 months ago

Sterling stuck near five-month lows as Johnson cements lead in race to become PM

LONDON (Reuters) - Sterling barely budged from near five-month lows after arch-Brexiteer Boris Johnson was confirmed as the frontrunner to become Britain’s next prime minister on Tuesday.

The British currency had dropped to its weakest since January against the euro and dollar earlier in the session, as investors worry that Johnson could put Britain on a path towards a disruptive no-deal Brexit.

Johnson, the face of the campaign to leave the European Union in the 2016 referendum, won 126 of 313 votes, by far the largest number in the second round of voting for Conservative Party leader, with four other candidates also getting through.

Sterling stood at $1.2551, up 0.1% on the day and unchanged from before the results were announced.

Against a euro weakened by European Central Bank signals of looser monetary policy, the pound stood 0.3% higher, at 89.235 pence, albeit still near five-month lows touched earlier on Tuesday.

“Boris Johnson seems so far ahead it’s a formality, despite UK political parties having a long history of surprising us with their choices,” Societe Generale analyst Kit Juckes said ahead of the results from the second round of voting.

(Graphic - Sterling vs euro, tmsnrt.rs/2InG1so)

Once the candidates are whittled down to the final two, the mainly pro-Brexit Conservative Party members will cast the deciding votes in July to select a leader to replace Prime Minister Theresa May.

Johnson has said he will take Britain out of the EU by Oct. 31, whether or not there is a deal with Brussels to smooth the transition.

UBS wealth management said it believed fears of a no-deal Brexit at the end of October were overdone.

“UBS’s base case is a further extension of the October deadline and eventually general elections in the UK, which should keep the exchange rate in a range around 0.87 (87 pence per euro) over 12 months,” its chief investment office said in a research note to clients.

Short bets against the British currency have been trimmed somewhat recently, but overall sentiment is fragile and recent optimistic talk from the Bank of England has done little to dispel the cloud of gloom hanging over the pound.

A bank employee counts pound notes at Kasikornbank in Bangkok, Thailand October 12, 2010. REUTERS/Sukree Sukplang/File Photo

Signs of weakening momentum in the British economy have also weighed on sterling.

While policymakers have said that benchmark interest rates may need to rise sooner than markets expect, traders are in no hurry to shift their expectations, with futures markets pricing in no rate hikes until well into late 2020.

Twenty economists polled by Reuters all expected the British central bank’s nine monetary policymakers to vote unanimously in favour of keeping borrowing costs unchanged at Thursday’s monetary policy meeting.

Additional reporting by Saikat Chatterjee; Editing by Catherine Evans and Kevin Liffey

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