While previous confidence votes against former prime ministers have dented the pound, broader economic unease has clouded the outlook as MPs prepare to vote on Mr Johnson’s future.
Economists said that Mr Johnson’s plans to scrap the Northern Ireland protocol, part of Britain’s post-Brexit trade agreement, has sparked fears of a trade war with the EU.
Philip Shaw, chief economist at Investec, said: “The line of thinking is that if there is a change in leadership of the Conservative party then the UK’s policy on Northern Ireland and Brexit could soften, thus alleviating the fears of a trade war.
“The other factor is that the UK is suffering under a cloud of uncertainty and perhaps the vote of no confidence is the beginning of the process of lifting that cloud one way or the other.”
Jane Foley from Rabobank added that the gains could be triggered by hopes that British politics “could be on the brink of pushing beyond scandal and distraction”.
She said: “Whether or not Johnson survives the confidence vote, [sterling] investors will be hoping it will clear the air and allow [the] Government to move on with the job in hand.”
It came after Bank of America, a top US lender, warned the pound was facing an “existential crisis”.
Analyst Kamal Sharma said a “unique” combination of pressures had resulted in a “confusing communication strategy” from the Bank of England, which had been accused of repeatedly wrong-footing markets last year.
He said the pound “is no longer the doyen of foreign exchange markets that investors think it is”.
Sunak blames ‘global shocks’
Addressing MPs on the Treasury Select Committee, Mr Sunak said current economic conditions had been driven by “global shocks” that were also affecting the United States and Europe.
He said: “I’m confident that we have the tools and the determination to get inflation down over time.”