The pound traded close to its lowest levels of 2019 on Tuesday morning, with markets increasingly fearful that Boris Johnson could succeed in the Conservative leadership contest and take the UK out of the EU without a deal.
Sterling tanked on Monday and hit a near six-month low overnight as Matt Hancock, a rival candidate who had dropped out of the race, gave Johnson his backing to be the next prime minister.
The pound was down by 0.1% against the dollar, to just above $1.25 (GBPUSD=X), at 9am.
It nevertheless gained by 0.1% against the euro, to almost €1.12 (GBPEUR=X), following a speech by European Central Bank chief Mario Draghi, during which he opened the door to further interest rate cuts.
“Sterling is increasingly reflecting the no-deal risk,” said Neil Wilson, chief market analyst at Markets.com, in a note.
“The EU says it won’t renegotiate (it may have to), MPs won’t accept the existing deal, and parliament has limited scope to stop this train.”
“Currency markets display fear that he has said he is prepared to take Britain out on 31 October without a deal if needs be,” said Wilson.
The pound closed under $1.26 on Friday, for the first time since prime minister Theresa May resigned as leader of her party.
Weak economic data is also to blame, with the UK economy contracting in April thanks to a weak manufacturing sector.
The second round of voting in the leadership contest gets underway on Tuesday, with the results expected at around 5pm local time. Candidates need at least 33 votes to progress.
Johnson is expected to retain his commanding lead, after winning the backing of 114 of the Conservatives’ 313 MPs in the first round.
Tom Belger contributed to reporting.