Johnson's weakness pins Britain's pound near 3-week lows

By Saikat Chatterjee and Joice Alves

LONDON (Reuters) -Sterling was volatile on Tuesday after falling to a near three-week low against the U.S. dollar on Tuesday, with investors on edge a day after British Prime Minister Boris Johnson survived a confidence vote that left him politically weakened.

Johnson won the vote 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.

Heightened political uncertainty dealt sterling, one of this year's worst performing major currencies, a fresh blow.

Having risen on Monday, the British currency fell 0.73% to its lowest level since May 19 at $1.2433 on Tuesday before trimming losses. It rose 0.40% on the day at $1.2584 at 1512 GMT as the dollar fell. [FRX/]

"The relief rally that lifted sterling yesterday was built around the hope that the confidence vote could draw a line under political distractions and allow the government to get on with the job in hand," said Jane Foley, head of FX strategy at Rabobank in London.

"Instead, the scale of the rebellion will ensure a cloud remains over Johnson’s future. This suggests that political distractions remain in place and his leadership could again be tested ahead of the 2024 general election," she added.

The currency has fallen 7% against a broadly strong dollar this year, weighed down by Britain's dismal growth outlook, which is casting doubt on the trajectory for interest rate rises by the Bank of England.

Reflecting the greater political uncertainty, expected swings in the British pound over a one-month period rose to its highest level since May 27.

"The PM has survived the no confidence vote, but the number of Conservatives MPs (members of parliament) who voted against him is substantial enough to weaken his position further," said Frederique Carrier, head of investment strategy for the British Isles and Asia at RBC Wealth Management.

Against the euro, the pound rose by 0.3% to 85.06 pence, touching a six-day high.

ING analysts said markets overpriced the impact of the political headlines on the UK economy, adding that they expected slowing growth and Bank of England's policy to be the central themes for sterling "over the coming days".

"Downside risks to the pound persist, but they are not strictly linked to the recent political developments," they told clients.

The 10-year gilt yield rose to its highest level since 2014 at 2.279% earlier in the day, before falling to 2.211%, while London-listed shares slipped 0.1% with sentiment also hit by a survey showing British shoppers cut their spending in May by the most since the country was in a coronavirus lockdown in early 2021.

(Reporting by Saikat Chatterjee and Joice Alves; Editing by Bradley Perret, Emelia Sithole-Matarise, Raissa Kasolowsky and Alison Williams)