Sterling holds gains as UK's Johnson wins confidence vote

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger
  • UK's Johnson wins confidence vote by narrow margin
  • Johnson could double down on Brexit, looser fiscal policy -analyst
  • Sterling vulnerable in short term -ING

LONDON/NEW YORK, June 6 (Reuters) - The British pound held gains late on Monday against the dollar and euro, after Prime Minister Boris Johnson won a confidence vote, called by members of his Conservative Party, but by a relatively modest margin.

In late afternoon trading, the British pound rose 0.3% to $1.2531 , while the euro fell 0.3% to 85.33 pence .

Johnson won the vote 211 to 148, according to Graham Brady, chairman of the party committee that oversaw the ballot. But Johnson's 59% share of the vote was less than the 63% achieved by his predecessor Theresa May in her confidence vote of December 2018. May was replaced seven months later. read more

"After winning tonight's confidence vote, the Prime Minister, Boris Johnson, may double down on Brexit and loosen fiscal policy further to try to boost his political standing," wrote Paul Dales, chief UK economist at Capital Economics in London, in a note after the confidence vote.

"That may result in a weaker pound, a stronger economy and higher inflation for longer, which would support our view that the Bank of England will raise interest rates from 1.00% now to 3.00% next year," he added.

Johnson was expected to survive the vote anyway, called after a growing number of lawmakers in the governing Conservative Party questioned the British leader's flagging authority over the "partygate" scandal, which led to police fines for Downing Street gatherings that broke COVID-19 lockdown rules. read more

Many analysts saw the confidence vote as potentially pound-positive, if it drew a line under partygate, and eased uncertainty over Johnson's threats to scrap post-Brexit agreements regulating goods shipments from mainland Britain to Northern Ireland read more .

It may also pave the way for a different leader eventually.

Stephen Gallo, European head of FX strategy at BMO Capital Markets, said "a Tory leadership change would eliminate (Johnson) as a liability factor for the Tories, reduce the likelihood of a second Scottish independence referendum in 2023, and possibly lead to ... higher public sector investment in the economy over the tax and spend approach."

The pound has been under pressure this year, having just wrapped up five straight months of losses, weighed down by Britain's dismal growth outlook that is casting doubt on the Bank of England's rate-hike trajectory.

Since the beginning of the year, the pound has fallen 7.3% against a resurgent dollar.

ING Bank analysts noted the pound had not reacted when the partygate scandal first exploded and even the prospect of a leadership change may not have many implications policy-wise.

They told clients that they saw the pound as vulnerable in the short term, given worsening growth prospects and a potential re-pricing of BoE rate expectations, adding that a fall below $1.25 could open the way for a decline to $1.2300-$1.2350.

Vasileios Gkionakis, head of currency strategy at Citi, said UK fiscal policy had been less forceful than needed to cushion the blow from higher energy prices.

"The market may be pricing the possibility that if Johnson is removed as the leader, then we may have a shift in UK policy especially in what concerns the fiscal stance."

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Currency bid prices at 4:31PM (2031 GMT)

Reporting by Lucy Raitano, Anisha Sircar in London and Gertrude Chavez-Dreyfuss in New York Editing by Sujata Rao, Mark Heinrich and Matthew Lewis

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