The pound dived to a near six-month low against the dollar on Monday as concerns grew that arch-Brexiteer Boris Johnson will replace Theresa May as prime minister as he remains far ahead of his rivals in the race to lead their ruling Conservative Party.
Johnson, the face of the official Brexit campaign in the 2016 referendum, has promised to lead the United Kingdom out of the EU with or without an agreement by Oct. 31.
He got a boost in his campaign on Monday when one of his former rivals and EU supporter Matt Hancock backed him saying he was almost certain to win the contest.
“It looks like Boris Johnson is going to be the next prime minister unless there is a big surprise and that indicates a looming confrontation with the European Union,” said Lee Hardman, a FX strategist at MUFG in London.
A median forecast for the chance of a disorderly Brexit rose to 25% in a June 11-14 Reuters poll, up from the 15% in May.
On Monday, the pound weakened a third of a percent to $1.2554 against the dollar, its lowest level since a Jan. 3 flash crash. Versus the euro, the pound weakened to a five-month low of 89.43 pence.
“Euro/sterling can trade to 92 (pence) and possibly to 95 (pence) this autumn as investors digest the trade-off between a no-deal Brexit and early elections,” ING strategists said.
Latest positioning data also indicated that markets were getting cautious about the pound, with speculative bets against the British currency rising to a four-week high.
The second round of voting in the Tory leadership contest is set for Tuesday, with the result due around 1700 GMT. Any candidate with 32 votes or fewer is eliminated. If all candidates have more than 32 votes, the one with the fewest is eliminated.
