Pound Slips as COVID-19 Restrictions Return, Brexit Looms

A new London lockdown and the arrival of a deadline in Brexit negotiations have triggered a sell-off of the pound.

The value of the pound dropped on Thursday as COVID-19 lockdown measures were reimposed across the UK and a key deadline arrived in Brexit talks.

The pound fell against the dollar and euro around noon on Thursday. Pound sterling fell 0.4% against the euro and 0.7% against the dollar, reaching €1.1025 and £1.2921 respectively.

The currency’s decline followed after UK health secretary Matt Hancock confirmed that restrictions would be increased in multiple regions of the UK from Saturday onwards. Most notable was the announcement that London would be upgraded to “Tier 2” restriction status in order to curb the continued spread of COVID-19, a move that is likely to impact major businesses in the area.

Under Tier 2 restrictions, separate households are banned from mixing indoors. Though pubs and restaurants will be permitted to remain open, the increased restrictions will likely have a significant impact on demand; Altus Group’s head of UK property tax, speculated that the measures “could be the death knell” for the more than 10,000 bars, pubs and restaurants in London.

The pound also suffered from investor attention turning towards Brexit negotiations. Last month, UK prime minister set 15 October as a deadline to reach a trade deal with the EU, pledging to walk away from the negotiations if an agreement could not be reached beforehand.

However, some investors remain confident that the passing of the deadline will not spell the end for a potential deal. “In our view, neither the UK prime minister’s 15 October deadline nor the European Commission’s 31 October deadline constitutes a hard stop on Brexit negotiations,” wrote Goldman Sachs economist Adrian Paul in a letter to clients on Thursday.

Though the pound gained around 1% against the dollar and euro on Wednesday, its gains were later reversed as French president Emmanuel Macron took a hard stance on EU fishing states retaining access to the UK’s waters.

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