Sterling has fallen through the $1.21 mark as speculation swirls that Prime Minister Boris Johnson is preparing to call a general election and the Tory party prepares for a dramatic showdown.
Johnson has unexpectedly called a cabinet meeting for 5pm, increasing speculation that he could be about to call a ‘people versus parliament’ election.
Traders reacted by selling off the pound, which has fallen over 0.8 per cent against the dollar to $1.205 and is edging closer towards the two-and-a-half year low seen in the middle of August.
Against the euro the pound has fallen 0.6 per cent to €1.099 but is still a way off the two-year lows seen at the start of last month.
Bookies slashed the odds of a general election dramatically, with Betway shortening the chances from 8/11 to 1/5.
Sterling was also dragged down by UK manufacturing output data for August released earlier today.
Figures showed that activity crashed to a seven-year low last month under the weight of Brexit uncertainty and a global economic slowdown.
IHS Markit’s Purchasing Managers’ Index (PMI) stoked fears of a recession after the UK economy contracted in the second quarter.
Political developments have rattled currency traders’ nerves in recent days. Johnson’s decision to suspend parliament has galvanised opposition MPs who could call a no-confidence vote or legislate to ask the EU for an extension.
“The pound is coming under early pressure over weekend headlines that appear to suggest that a possible election could come sooner rather than later,” said Michael Hewson, chief market analyst at CMC Markets UK.
Adding to the uncertainty among traders is a looming showdown between Tory MPs, who have been threatened with ejection from the party if they vote against the government on key legislation, for example to block a no-deal Brexit.
“The tug of war inside the Conservative party set to play a key part in determining how the pound fares in what is likely to be a turbulent week,” Hewson said.
Jefferies chief European economist David Owen said the situation is highly unpredictable. “All the war-gaming in the world by [Johnson’s top adviser] Dominic Cummings will not necessarily be able to predict what will happen next. Every action will have unintended consequences.”
Craig Erlam, senior market analyst at Oanda Markets, added: “It’s going to be a seriously eventful week in parliament, that’s for sure, as MPs opposed to no-deal do everything in their power to stop it before they’re gagged until the middle of October.”
“I don’t think sterling volatility is going anywhere soon.”