The pound extended gains after Boris Johnson dropped out of the race to be the next Conservative Party leader last night.

The pound was rallying as much as one per cent to $1.1401 in early Asia trading on expectations that Rishi Sunak, broadly seen as being better qualified at trying to fix the UK’s finances, would become the new prime minister.

“A Sunak-led government seems more welcome for stability,” said Mahjabeen Zaman, head of FX research at Australia & New Zealand Banking Group. “While the risk premium in FX from the original budget has been reduced by the U-Turn, the pound still faces ongoing challenges.”

Sunak looks set for the coronation today as the UK’s third prime minister this year after Johnson’s withdrawal from the Tory leadership race on Sunday night.

Johnson’s retreat leaves Sunak and leader of the Commons Penny Mordaunt as the only declared contenders in the contest to succeed Liz Truss, with the former chancellor enjoying a significant lead in endorsements from Tory MPs.

The former chancellor was closing in on the figure of 179 nominations from Tory MPs needed to account for half the parliamentary party on Sunday night, with rival Mordaunt trailing with just 26 public declarations of support.

Johnson issued a statement insisting that he had “cleared the very high hurdle of 102 nominations” required to appear on the ballot of Conservative MPs, but said he had “sadly come to the conclusion that this would simply not be the right thing to do”, adding: “You can’t govern effectively unless you have a united party in parliament”.

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