Pound gains on the dollar as Rishi Sunak leads UK PM race

Since Boris Johnson withdrew from the contest for the Tory leadership, Rishi Sunak has become the favourite to become the next UK prime minister, and the pound has strengthened against the dollar.

Sterling was trading at $1.134, up about 0.4% on Monday morning.

As the markets reopened following the weekend, the cost of borrowing money from the government decreased.

Also read: Rishi Sunak favourite for next UK PM: Everything expected to happen today

The only contender with the support of more than 100 Tory MPs necessary to be included in the party members’ vote is former chancellor Sunak.

Johnson withdrew from the race after declaring he wouldn’t be able to bring his party together, despite having the support of 102 MPs, of which only 57 officially declared their support.

Penny Mordaunt, the leader of the Commons, is also still running but she remains short of 100 supporters. The deadline is Monday at 14:00 local time.

Following the mini-budget presented by outgoing Prime Minister Liz Truss, the value of the pound fell to a historic low versus the dollar last month, and the cost of borrowing money for the government shot up.

Also read: Rishi Sunak favourite for next UK PM: 3 other Indian-origin world leaders

Investors were alarmed after former Chancellor Kwasi Kwarteng made significant tax-cutting promises without outlining how they would be paid for; Sunak had forewarned about this during the Tory leadership race this summer.

In an effort to calm the financial markets last week, the new Chancellor Jeremy Hunt rescinded almost all of Truss’s tax cuts, but the markets have remained uneasy.

On Friday, amid ongoing political unrest and new economic cautions for the UK, the pound dropped as low as $1.11 and government borrowing costs increased.

Following Johnson’s move, borrowing costs for the government decreased on Monday.

Also read: Boris Johnson pulls out of Tory race for UK PM

The yield on bonds with a 30-year maturity fell to 3.9%, making borrowing from the government more affordable. They had reached 5.17% on September 28th, following the mini-budget and Kwarteng’s promise to announce additional tax cuts.

On October 31, Hunt—who is supporting Sunak—will lay out the government’s economic strategy for taxes and spending. The administration would have to make “decisions of eye-watering difficulty,” he has warned.

Guy Hands, a banker, and ardent Conservative supporter, however, claimed on Monday that the Conservative Party was unfit to govern the nation and ran the risk of having to request a bailout from the International Monetary Fund (IMF).

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“I think it’s got to move on from fighting its own internal wars and actually focus on what needs to be done in the economy,” Hands said, adding, “And admitting some of the mistakes they’ve made in the last six years which have frankly put this country on a path to be the sick man of Europe.”

He stated that the UK would soon need an IMF bailout “like we were in the 70s” due to rising taxes, diminished public services, and higher interest rates.

The UK is facing a “more difficult” period of austerity than the one that followed the 2008 financial crisis, according to a warning issued over the weekend by the former governor of the Bank of England.

Also read: After Liz Truss: How will Tories elect the next UK Prime Minister?

According to Lord Mervyn King, “significantly higher taxes” may be imposed on the typical citizen to pay for public expenditures.

While Sunak’s status as the frontrunner “should help” soothe the markets, Megan Greene, the global head economist at the Kroll Institute consultancy, said that “the UK has a really tough line to walk.”

“On the one hand it can’t provide these budgets that are fiscally irresponsible, or that seem fiscally irresponsible, we’ve seen what happens with the market then, but equally Rishi Sunak is going to come and probably announce a lot of austerity and he can’t go too far on that end either because then the markets will look at that and think the UK is never going to grow. Even without all the political drama, the economic environment in the UK is incredibly difficult,” Greene added.