FX round-up: Pound knocked lower by political uncertainty

Sterling retreated at the start of the week, weighed down by the risk of a leadership contest, against the backdrop of a stronger US dollar which was continuing to change hands just below its 52-week highs.

Earlier, backbench MPs had demanded that May appear before the 1922 Committee on Wednesday night with unrest growing amongst the Tories after reports last week the PM is considering an extension to the transition period. There were reports that 46 Tory MPs have sent letters of no confidence to the chairman of the influential committee, just short of the 48 needed to trigger a leadership contest.

As of 2053 BST, cable was down by 0.77% to 1.29671 versus the US dollar, alongside a gain of 0.36% for the single currency against the pound to 0.88440.

The latter was especially conspicuous given that the euro had traded on the back foot against the dollar throughout most of the afternoon in the wake of the ongoing tensions in Italian debt markets, although they had ebbed a little since last Friday.

In parallel, the US dollar spot index was tacking-on 0.390% to 95.9960.

Euro/dollar was down by 0.4% to 1.1680.

The US dollar was also stronger against the Japanese yen, adding 0.24% to 112.816.

Commenting on the outlook for the yen, Jane Foley at Rabobank predicted that it would finish the year near the 113 yen level against the US dollar.

"It can be assumed that if US stocks bounce higher USD/JPY will follow. However, if 'risk-off' sentiment continues to undermine US stocks, the JPY will likely be better supported," Foley said.

"[...] In our view, the fact that the US maintains both a current account and a budget deficit means that the USD cannot claim to be a true haven and will continue to underperform the JPY when investors are truly running for the hills."

Acting as a backdrop, overnight Chinese officials unveiled tax cuts in a bid to prop up the economy, close on the heels of reports, at the weekend, that the US was intending to do the same, but for "middle-income" families this time.

Related to the news out of Washington, there was some 'market-chatter' regarding the possibility that a good-showing for US democrats in the upcoming mid-term elections could see a push for fiscal consolidation on the Hill, which in turn might lead to a flatter Treasury yield curve.

In the emerging market space meanwhile, Russia's rouble and Brazil's real were outperforming, with the Greenback lower by 0.36% versus the former to 65.2249 and by 0.59% to 3.6889 against the latter.

It was also down against the Argentine peso, by 0.19% to 36.4674.

Versus the Turkish lira on the other hand it was up by 0.45% to 5.6663 and against the Mexican peso by 0.60% to 19.3992.