Update: Sterling sideways amid Boris Johnson pick and no-deal Brexit possibility

Euro touched a five-week low as easing monetary policy looms over currency markets

Boris Johnson has won the UK Conservative party leadership contest and will take office as Britain's new prime minister. Getty
Boris Johnson has won the UK Conservative party leadership contest and will take office as Britain's new prime minister. Getty

The pound traded sideways against the US dollar following the announcement by Britain’s governing Conservative Party that Boris Johnson had been elected its new leader. Mr Johnson beat foreign secretary Jeremy Hunt in a leadership contest voted on by party members.

The pound was largely flat against the dollar at $1.2461 following the announcement, and traded marginally higher against the euro, at €1.1148 at 3.08pm.

Sterling had been trading lower earlier on Tuesday as investors worried Mr Johnson, the frontrunner to become the UK's next prime minister, would trigger a "hard Brexit" from the European Union, widely seen as a major risk for the British economy.

The euro briefly touched the lowest in five weeks due to growing expectations European Central Bank president Mario Draghi will signal a rate cut in September at a policy meeting later this week to keep inflation expectations on track.

Speculation over the likelihood of a no-deal Brexit and questions over how far major central banks will ease monetary policy are likely to set the tone for currency markets in coming weeks, traders and analysts said.

"Johnson is expected to become the new prime minister, so there is a real chance of a hard Brexit," said Takuya Kanda, general manager of research at Gaitame.Com Research Institute in Tokyo, prior to the announcement.

"In the short term, further declines in the pound could be limited because positions are already very short. In the medium term, sentiment for sterling will remain soft."

Sterling has fallen 3.7 per cent versus the dollar in the past three months due to uncertainty about how Britain will avoid a no-deal exit from the EU.

There is growing speculation Johnson will pull Britain out of the EU on October 31 without a trade deal in place.

Hedge funds have increased short positions on the pound to a 10-month high in the week to July 16, Commodity Futures Trading Commission data shows.

The euro briefly fell to $1.1191, the lowest since June 19, as traders awaited the ECB's policy meeting and Mr Draghi's comments at a news conference on Thursday.

Traders see a 43 per cent probability that European policymakers will lower a key deposit rate by 10 basis points to minus 0.50 per cent to combat risk from global trade tensions.

Economists surveyed by Reuters expect the ECB to change its forward guidance to pave the way for a rate cut in September.

The US central bank is widely expected to lower its target range of 2.25 per cent-2.50 per cent by 25 basis points at a meeting ending July 31, but expectations for a larger 50-basis point cut have waxed and waned due to mixed signals from Fed policymakers.

Updated: July 23, 2019 03:23 PM


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