Sterling stuck near 2-1/2-year lows as Truss set to become UK's new PM

By Samuel Indyk

LONDON (Reuters) - The pound was stuck near 2-1/2-year lows against the dollar on Monday, as Liz Truss was set to become Britain's next prime minister after winning a leadership race for the governing Conservative Party against a deteriorating economic backdrop.

Sterling was down 0.27% at $1.1488, having fallen to as low as $1.1444 earlier in the day amid news that Russia would keep one of its main gas supply routes to Europe shut, adding to UK recession fears.

Against the euro, sterling was up 0.14% at 86.325 pence.

Truss won the ruling Conservative Party's leadership contest on Monday with 57.4% of the vote. Former Chancellor Rishi Sunak received 42.6% of the vote.

In a short victory speech, Truss said she would "deliver a bold plan to cut taxes and grow our economy," adding that she plans to "deal with the crisis in people's energy bills," but details of her plans were in short supply.

"The pound would have lifted higher had Rishi Sunak won as he was more committed to getting a hold on inflation, while Truss is prioritising tax cuts," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown in London.

"That's why you've seen such nervousness, particularly in the currency markets, because of worries about what damage this could do to the long-term stability of the UK," Streeter added.

The pound, one of the worst-performing major currencies against the dollar this year, has slumped 15% so far this year.

A move in sterling below $1.1413 would take it to its lowest level since 1985, according to Refinitiv data.

The currency has been battered by a deteriorating economic outlook and stubbornly high inflation.

Its latest leg lower came after Russia said on Friday it would not restart gas supplies to Europe through the Nord Stream 1 pipeline.

The benchmark gas price rose as much as 35% on Monday, delivering another economic setback to the new PM on ongoing fears that Britain will face an energy supply crunch through winter.

"Truss said that by the end of the week she will present details of her energy plan and maybe lift the veil of her fiscal plans and that's what the market wants to hear," said Kenneth Broux, senior currency strategist at Societe Generale.

(Reporting by Samuel Indyk in London; Editing by Dhara Ranasinghe and Matthew Lewis)