Pound hits two-year lows as political uncertainty weighs

By Saikat Chatterjee

LONDON (Reuters) -The British pound dropped to a two-year low on Monday as traders moved to the sidelines as a leadership contest kicked off to determine Britain's next prime minister.

Worsening risk appetite before the all-important U.S. inflation data this week sent the dollar surging against its main rivals. [FRX/]

Boris Johnson's resignation as prime minister deepened the uncertainty hanging over the British economy, already under strain from an inflation rate heading for double digits, the risk of a recession and Brexit.

Whoever succeeds Johnson must take big decisions on tax and spending that could reduce the risk of a recession but might also add to the inflationary heat in the economy. nL8N2YN5FE]

Against the U.S. dollar, the pound was trading at $1.1867, its lowest levels since March 2020 and down 1.2% on the day. Versus the euro, the pound was marginally weaker at 84.80 pence.

The leadership debate comes during a busy week in terms of economic data for Britain's economy with monthly GDP data due.

Economists expect May GDP data to show no growth, reinforcing expectations of an economic contraction in the second quarter.

"Although pound investors will be hoping for a government less distracted by scandal and more focussed on providing coherence around the post Brexit economy, the jury is still out," Rabobank strategists said.

"The pound may suffer a lack of fresh direction until the new Prime Minister is in place."

Latest weekly positioning data showed a slight increase in short pound bets to $4.2 billion though they remained well below a November 2019 high of $6.3 billion.

(Reporting by Saikat Chatterjee; Editing by Kirsten Donovan, Chizu Nomiyama and Angus MacSwan)