LONDON (Reuters) - Sterling fell for a third consecutive day on Thursday as growing political turbulence surrounding Prime Minister Theresa May's government sapped institutional investors' demand for British assets.
While the dollar has been generally weak against its rivals, the British currency stood out for its weakness across the board, falling against the Japanese yen and the euro.
Though market positioning had become decisively less bearish towards sterling before the Bank of England's decision to raise interest rates last week, investors have become a bit more bearish about the outlook after this week's political turmoil.
The pound fell 0.1 percent against the dollar to $1.3104. It is 1.6 percent below last Thursday's level when the BoE raised interest rates for the first time in more than a decade, and is hovering above a one-month low of $1.3040 hit lat Friday.
Against the euro, sterling weakened 0.3 percent to 88.69 pence.
"You're not getting a lot of decisiveness on the part of real money investors … I don't think real money flows are that significant in sterling at the moment," said Stephen Gallo, European head of FX strategy at BMO Financial Group in London.
A string of scandals leading to two resignations from the cabinet in the space of just one week has raised doubts over the Conservative government's ability to secure a strong deal in negotiations over Britain leaving the European Union, which restarted in Brussels on Thursday.
Investors in sterling assets have also been hit by widening bond yield differentials in recent days. The gap between short-dated U.S. and British government yields has widened to a near five-month high of 119 basis points.
But despite the rising political turmoil, markets are not yet pricing in a potential change in government.
"In the short-term, political uncertainty will remain high. But it is unlikely to rise even further," Credit Agricole currency strategist Manuel Oliveri said.
"A lot would be needed to derail political sentiment even further," he said.
Latest positioning data show investors are broadly flat on sterling after being short sterling for most of the year.
(Reporting by Polina Ivanova; and Saikat Chatterjee; editing by Emelia Sithole-Matarise)