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Britain's political risks, economic fears keep sterling under pressure

·2-min read
FILE PHOTO: A shop cash register is seen with both Sterling and Euro currency in the till at the border town of Pettigo

By Joice Alves

LONDON (Reuters) -Sterling fell on Wednesday, staying close to a near three-week low touched this week against the U.S. dollar, amid worries for the UK economy and investor nervousness about a confidence vote on British Prime Minister Boris Johnson that left him politically vulnerable.

Heightened political uncertainty has added further pressure on sterling, which has declined more than 7% this year, weighed down by Britain's dismal growth outlook.

Johnson won the vote on Monday by 211 votes to 148, seeing off a challenge to his leadership brought by lawmakers from his Conservative Party. But the larger than anticipated rebellion leaves him battling to win back the confidence of his colleagues and the public.

The British currency fell 0.3% against the U.S. dollar to $1.2552 at 1450 GMT after touching its lowest level since May 19 at $1.2433 on Tuesday.

Against a strengthening euro ahead of a European Central Bank meeting on Thursday, the pound fell by 0.7% to 85.60 pence. [FRX/]

Chris Turner, Global Head of Markets at ING, expects sterling to be bracing for more politically-induced volatility this month, but if Johnson's political weakness translates into earlier tax cuts, he said, the pound could find some support.

"Sterling will face more volatility around two UK by-elections to be held on 23 June - both of which the Conservatives stand a real risk of losing," Turner said.

"Yet the Conservatives still retain a substantial majority in the Commons and if anything, pressure at the polls could translate into earlier tax cuts to appeal to the base".

Fear that weakening economic data might slow the Bank of England's path to rate hikes has weighed on sterling.

Mortgage lender Halifax said on Wednesday that the annual pace of house price increases in Britain slowed in May for a third month in a row and a further cooling of demand is likely as households struggle with high inflation.

"My general view on the GBP is a bearish one," said Michael Brown, Head of Market Intelligence Caxton.

"Given the stagflation facing the UK economy, favour selling sterling rallies," he said.

(Reporting by Joice Alves; Editing by William Maclean and Jonathan Oatis)

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