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Sterling falls to fresh two-year low on leadership race concerns

·2-min read
UK pound coin drops into yellow watercolour in this illustration picture

LONDON (Reuters) -Sterling slipped to a fresh two-year low against the dollar on Tuesday as political uncertainty weighed on sentiment, before broad-based weakness in the dollar offered the British currency some respite.

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

Britain's main opposition Labour Party will put forward a motion for a no-confidence vote in Johnson's government on Tuesday, with the vote expected to take place on Wednesday, a party source said.

"Sterling will be buffeted by leadership questions as there is a question about the extent to which we will see a conservative leader who is intent on fiscal discipline or a prime minister intent on unfunded tax cuts, which would trigger a more aggressive response from the Bank of England," said Sarah Hewin, a senior economist at Standard Chartered.

"Until the leadership question is decided, sterling may stay volatile."

In late afternoon trade, sterling was steady on the day at $1.18940, having fallen to as low as $1.18075. It is down just over 2.5% so far this month.

Against the euro, sterling was also softer at around 84.55 pence - about 0.12% weaker on the day. Earlier, the euro had briefly dipped to its weakest against the pound since May.

The issue of tax cuts is fast becoming the central battle in the ruling Conservative party's leadership race with nearly all of the candidates promising to cut business or personal taxes.

Former finance minister Rishi Sunak set out his leadership campaign pitch on Tuesday, offering himself up as an "honest" prime minister who would balance the books, reduce the role of the state and grow the economy.

Aside from politics, weakening economic data is also a factor. Economists expect May GDP data on Wednesday to show no growth, reinforcing expectations of an economic contraction in the second quarter.

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 and Dhara Ranasinghe; editing by Susan Fenton and Mark Heinrich)

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