(Bloomberg) --
The pound whipsawed as Brexiteer Boris Johnson took a commanding lead in the first round of voting to elect a new British prime minister.
Sterling initially fell on the result before recovering some ground, with the market already anticipating a Johnson win and some of the other euroskeptic candidates being eliminated. A gauge of price swings over the next week has climbed the most since early May, as traders anticipate moves on the leadership contest and the Federal Reserve decision next week.
“Boris will very much likely be in the final two and become the prime minister if it goes to a vote of Tory members,” said Jordan Rochester, a currency strategist at Nomura International Plc. “But the price action shows that this is a crowded market in short sterling now and even consensus non-events lead to small rallies.”
Investor positioning has turned increasingly short on sterling over the past month, according to data from the Commodity Futures Trading Commission. The Conservative leadership election is adding yet more uncertainty, with several candidates including Johnson saying they will seek to take the U.K. out of the European Union if a deal cannot be reached by the current deadline of Oct. 31.
The pound was little changed at $1.2686 by 2:37 p.m. in London, after swinging between gains and losses of 0.2%. It remains the worst-performing currency among peers in the past month.
Following Thursday's voting, there are seven candidates remaining in the running to replace Theresa May. Johnson gained 114 votes, well ahead of Foreign Secretary Jeremy Hunt on 43 and Michael Gove on 37, with Brexiteers Andrea Leadsom and Esther McVey knocked out. The next round will take place on Tuesday and the hopefuls will be whittled down to a final pair later this month to be voted on by Conservative party members.
While the results are overwhelmingly in favor of Johnson, they may help the pound consolidate as candidates with a softer line on Brexit are in second and third place, suggesting the choice may still be between a deal and a no-deal Brexit supporter, according to Credit Agricole SA strategist Valentin Marinov.
--With assistance from Vassilis Karamanis.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Scott Hamilton
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