LONDON: Sterling on Friday slipped to a whisker off recent five-month lows against the euro after Brexiteer Boris Johnson moved closer to becoming British prime minister, worrying investors that his government would make a no-deal Brexit more likely.
It eased versus the dollar as well but stayed on course for a weekly gain against the greenback after the Bank of England stuck to its message that interest rates would need to rise, contrasting with the US Federal Reserve which is now expected to cut rates from July.
After a busy week for monetary policy, sterling traders will turn their attention back to British politics and the Conservative Party leadership contest.
Johnson faces foreign minister Jeremy Hunt in a contest to succeed Theresa May as party leader and prime minister, with Johnson the odds-on favourite to secure a majority of votes from the Conservative Party. The new leader will be chosen by a ballot of party members, with the result due next month.
Whoever triumphs, the new prime minister will try to wring a tweaked Brexit withdrawal deal more palatable to British politicians from a sceptical Brussels that has said there will be no further negotiation over the agreement.
The current deal has been rejected three times by the British parliament, and if Johnson or Hunt cannot get it or another version passed, investors worry Britain will leave the European Union on Oct. 31 without transitional trading arrangements in place with its largest trading partner.
"Johnson is the firm favourite and based on our scenario analysis of a Johnson leadership, GBP could run into trouble this autumn," ING analysts said in a note.
Sterling was trading flat by 1600 GMT at $1.2697. That still left the British currency up 0.7% this week, with most of the gains down to a selloff in the dollar after the Fed opened the door to looser monetary policy.
But the pound has not fared as well against the euro, and was down 0.3% at 89.18 pence. It traded at 89.74 pence on Tuesday, the highest since January.
Sterling has lost 4% against the euro since May 1, as investors price in a greater risk of a no-deal Brexit.
Some analysts reckon the currency will enjoy some support, given the BOE hasn't yet made the dovish pivot seen in the United States and euro zone.
"We think that sterling weakness over the last few weeks has been overdone. We expect a rebound of sterling/dollar to $1.32, from $1.27 over three months," UBS analysts said.