Markets have continued to react positively to the news that Boris Johnson has dropped out of the Conservative Party leadership race, leaving former Chancellor Rishi Sunak likely to become the next prime minister of the United Kingdom.

The pound spiked from $1.13 to $1.14 last night upon hearing the news that Johnson - who was dumped by his Parliamentary party as leader just a few months ago - had withdrawn from the race, settling back at $1.13 as of time of writing, reports Investment Week.

Gilt markets reacted very positively to the news, with ten-year gilt yields dropping from 4.1% to 3.8% upon opening this morning, before rising slightly to 3.9%.

Two-year yields reacted similarly, dropping from 3.7% to 3.4% upon opening, before rising to 3.5% at time of writing.

However, markets are still not fully recovered from the damaging months of economic turmoil that have come since Liz Truss became prime minister. Three months ago, ten-year gilt yields sat at just 1.9%, while the pound was worth $1.20.

The stock market has remained fairly stable since opening this morning, with the FTSE 100 down 0.3% while the domestically focused FTSE 250 is up 0.2%.

With Sunak receiving nomination from close to a majority of Conservative MPs, it seems likely he will become prime minister, though House of Commons leader Penny Mourdant is fighting to reach the 100 backer threshold before close at 2pm today.

It is expected that Chancellor Jeremy Hunt will remain in place in the case of a Sunak victory, further easing market instability as it sees him as a less volatile political actor.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown said: "The cult of Boris which was hanging over the Conservatives like a charm of enchantment has for now been broken, sending the pound higher, after the former prime minister said he would not stand again."

She said: "Westminster is rife with speculation that he had not garnered enough support from MPs, despite his protestation of the contrary."

However, some have begun to warn that the UK may be forced to take a bailout from the International Monetary Fund, including prominent Conservative donor Guy Hands.

Michael Michaelides, fixed income analyst for Carmignac, said: "The appointment of a new prime minister should see the political drama settle, but this cannot disguise how the UK looks to international investors. For us, it's not so much who is in Downing Street that matters but what they do.

"Until the mini-budget, the UK was perceived as having a best-in-class fiscal framework under the Office of Budget Responsibility (OBR). Its reports are closely scrutinized, and international investors trust its role in monitoring the UK's fiscal rules.

"This was a key reason that investors did not penalize the UK's slower budget consolidation after the financial crisis and funded its persistent budget and current account deficits. Even now the UK's ‘structural' deficit is higher than any of its G7 peers, bar the US. The US issues the world's reserve currency, the UK does not.

"That is the whole point of credibility. It must be painstakingly built up but can be quickly squandered."

Streeter said that whoever gains the keys to Number 10 has a "daunting task ahead of them", with a looming recession, volatile energy prices, continued supply chain tangles and labour shortfalls, as well as the Bank of England determined to raise interest rates to bring rampant inflation under control.