Sterling was on course for its biggest drop since September after the UK was hit by travel restrictions owing to a new strain of coronavirus and as investors became increasingly nervous about deadlocked Brexit trade negotiations.
The currency lost as much as 2.4 per cent against the dollar on Monday morning to trade as low as $1.319 and slipped 1.1 per cent against the euro to €1.09 after several countries cut off access to the UK because of fears about the new variant of Covid-19. The pound recovered some of its poise in afternoon trading hours in London, trimming its losses to 1.1 per cent on the day and trading at $1.3323.
Concerns about the rapidly spreading strain have sparked safety-seeking bets and investors sold riskier currencies that depended on robust global growth. The euro lost 0.8 per cent against the dollar to trade at $1.2160 before bouncing to $1.2213. The Australian dollar also started the day 1.7 per cent weaker before bouncing back.
The development caused several countries to shut off access to the UK, with many flights grounded. The transport of goods across the English Channel was suspended, with the vital link between the UK and Europe shutting down.
London and large parts of the UK have also entered a new phase of strict restrictions as the government attempts to curb the spread of the virus.
“The negative developments clearly have increased downside risks for the UK economy and the pound, and will dampen the scope for any gains on the back of a Brexit trade deal before year-end,” said Lee Hardman, a currency strategist at MUFG in London.
The lack of a breakthrough in trade talks between the EU and the UK has also dented hopes that the two sides could agree a deal before the December 31 deadline, dragging sterling lower.
Traders in options markets have readjusted their expectations for large price moves in sterling, reflecting growing nervousness about the currency’s prospects over the next four weeks, owing to the looming threat of supply disruptions because of the pandemic and the lack of a trade deal between the UK and the EU.
“The travel and especially any prolonged disruptions in freight transportation as a result of the Covid developments will probably amplify the volatility in sterling in the event of a ‘no-deal’ Brexit, and that is what the market is responding to,” said Kamakshya Trivedi, co-head of global forex, rates and EM strategy at Goldman Sachs.
Petr Krpata, a currency strategist at ING Bank, said sterling’s losses would be more pronounced against the dollar than the euro because concerns about the new virus strain were starting to hit European currencies as well.
“The new virus mutations are confined to Europe and weigh on European forex as a whole against the dollar,” Mr Krpata said.