The pound has hit a one-month low against the US dollar as concerns about a potential Conservative leadership contest weighed on FX desks.
Sterling fell to $1.306 today, its weakest level since 6 September. Against the euro, the pound fell to a three-week low of just under €1.118.
Traders were concerned an ousting of Prime Minister Theresa May could put a November interest rate hike on ice.
The overnight sell-off means sterling is on course for a near 2.5 per cent fall in value over the week, its worst five-day performance since last October's dramatic flash crash.
Pressure mounted overnight on May after former Tory party co-chairman Grant Shapps said he had prepared a list of around 30 MPs ready to call for May's resignation.
The news prompted Tory heavy-hitters to spring to the PM's support. Amber Rudd told the Daily Telegraph that the UK is on a better path with May at the helm. Meanwhile First Secretary of State Damian Green rubbished suggestions May should quit after struggling in her closing speech at the Conservative party conference on Wednesday.
However, ING analysts said markets have priced into the pound a 75 per cent chance of a November rate hike by the Bank of England. They added:
A dovish BoE re-pricing on its own could see GBP/USD tumble below 1.30, while an increase in the short-term political risk premium priced into the pound could fuel the move lower towards 1.26-1.27.
'Thick of it'
Spreadex financial analyst Connor Campbell said:
The sound of sharpening knives has only grown louder since Theresa May’s 'Thick of It-esque' speech mid-week... Another Tory leadership battle would be seriously bruising for the pound, especially since, at the moment, there is no real clear – or, at least, market-preferred – candidate to replace May.
Despite the concerns, a Reuters poll of economists published today suggested there will not be a dramatic run on the pound. Some 11 of the 29 experts quizzed believe the pound will be at the same value at the end of October as it is now.
“In light of lingering political and economic uncertainties in the UK, we doubt that the market will turn massively long on the pound just yet,” said BBVA's Roberto Cobo Garcia.