Sterling’s rally yesterday has fully reversed as investors conclude the resignation of Liz Truss as Prime Minister does not necessarily mean political uncertainty will be removed. Economists at MUFG believe that GBP/USD could return to sub-1.10 levels.

Potential for GBP underperformance also versus EUR

“The pound remains vulnerable to the downside and we still see levels well below 1.1000 as achievable. The conviction of the view comes more from the US dollar side but we also see potential for GBP underperformance versus EUR.”

“The political mess in the UK is unlikely to go away. If the right of the party (the Johnson/Truss/hard Brexit supporting faction) loses power the divisions will remain and getting tax rises/spending cuts through parliament could remain a challenge.”