Sterling supported by expectations Rishi Sunak will become prime minister

Sterling strengthened on Monday finding short term relief from the likelihood that former finance minister Rishi Sunak would become Britain's next prime minister after Boris Johnson quit the race.

The pound was an outlier among major currencies as most others weakened against the U.S. dollar GBP=D3, =USD. It rose as far as $1.1402 in Asian trading before paring gains to hold just inside positive territory at $1.1323.

Sterling's moves against the euro were sharper with the common currency falling 0.5% to 86.84 pence. EURGBP=D3

Sunak, who has the backing of around 150 lawmakers, could be named leader as soon as Monday to replace Liz Truss, becoming Britain's third prime minister in less than two months.

Former prime minister Boris Johnson had raced home from a holiday to see if he could enter the ballot. However, he said on Sunday that while he had secured sufficient support to proceed to a vote by Conservative Party members, he realised that he could not govern effectively "unless you have a united party in parliament".

Markets initially welcomed the news, with British government bonds also rising with the pound but struggling to hold on to the gains.

"We maybe have a bit less chaos with Boris Johnson not running but it's not like Rishi Sunak has a strong programme presenting greater horizons ahead for the UK economy when the backdrop is still the backdrop," said John Hardy head of FX strategy at Saxo Bank.

Hardy said he didn't see a return of the "chaos" that sent the pound to a record low of $1.0327 on Sept. 26 and caused a spike in euro/ sterling as the Bank of England and the government would send the right signals. "But I just don't see a strong steady improvement," he added.

The pound tumbled and gilt yields soared as a fiscal plan containing a raft of unfunded tax cuts unveiled by then finance minister Kwasi Kwarteng spooked markets. The so-called 'mini budget' also ultimately led to the removal of Truss as Prime Minister.