Pound Whipsawed by Virus Concerns, Relief on Brexit-Talks Offer

(Bloomberg) - The British pound fell the worst since March amid concerns about a new strain of coronavirus in the UK, and then scaled back much of the decline when Prime Minister Boris Johnson made another offer to save the Brexit talks.
The pound sterling fell 2.5% to $ 1.3188 before recovering for most of the afternoon in New York. As of 3:25 p.m. it fell just 0.4% to $ 1.3475.
Investors used to be terrified when another deadline for Brexit passed with no results and Britain's largest port in Dover shut down all traffic on the continent and threatened the UK's supply chains with Europe. The currency's one-week implied volatility was the highest during the Christmas season in more than a decade.
The Bank of England's expectations of monetary easing rose and money markets put forward bets on a 10 basis point rate cut in September compared to March 2022 on Friday. Ten-year bonds rebounded, yields fell as much as nine basis points, and the FTSE 100 stock index fell as much as 3.3%. While the slump also reflected the strength of the dollar, the British currency also fell against the euro, with the common currency rising 1.7% to 92.17 pence.
"All of this is unwanted news at a time when there was already much to be feared," said James Athey, money manager at Aberdeen Standard. “The markets are generally overly complacent about the risks out there. The pound is no exception. "
The risk of the UK leaving the European Union at the end of the year without a trade deal was compounded by the prospect of immediate food delays after a new strain of Covid-19 was discovered in the UK. Prime Minister Johnson outlined new restrictions on London and the South East, while several countries suspended entry from the UK.
"If you transfer Brexit to this mess and now to the Dover shutdown, I can't see how we can avoid an interruption in the supply of perishable goods," said Jane Foley, head of FX strategy at Rabobank, adding: that a In a no-deal scenario, the euro could rise to 95 pence or more. "The pound will remain sensitive to news related to Brexit in the coming days."
Johnson's views
The moves mark a turnaround after the pound sterling rose to its highest level in almost five months last week amid a weaker dollar and speculation that an agreement could be reached on Sunday, a deadline set by the European Parliament.
In his latest offer late Monday, Johnson argued that the EU should cut the value of fish caught in UK waters by about a third after insisting last week that the EU accept a 60% cut. Johnson had said earlier that day that leaving the EU without a free trade agreement would be "completely satisfactory".
The relative cost of hedge a weaker sterling at the end of the year hit its highest level since the peak of the coronavirus panic in March and was the most expensive among the major currencies.
"With the news flow regarding Covid and supply disruptions, a breakthrough in trade appears to see the pound's headroom to narrow significantly," said Mark Dowding, chief investment officer at BlueBay Asset Management LLP overseeing a total of $ 70 billion.
More than 16 million Britons are now forced to stay at home as a full lockdown went into effect in London and the south east of England on Sunday. This is part of Johnson's efforts to contain an "out of control" new strain of coronavirus.
The recent outbreak is likely to result in economic restrictions being tightened for longer, said Lee Hardman, strategist at MUFG.
"The deeper, slower and more protracted slowdown will put pressure on the BOE to adopt negative interest rates," he said. "It increases the downside risk for the pound even if there is a last minute Brexit trade deal."
Sticking point
The pound has followed every development of Brexit since the June 2016 referendum on leaving the EU. A key sticking point is access to UK waters for fishing. The fishing industry accounts for only 0.1% of the UK's gross domestic product, but it is of great political importance. The Johnson administration sees this as a symbol of national sovereignty.
If a trade deal is not concluded by the end of the month, decades of free movement of goods, services, people and capital will come to an abrupt end. British firms would trade with the EU again according to the rules set by the World Trade Organization.
This means that imports and exports to the EU would be subject to WTO-negotiated tariffs - essentially a tax on goods. According to analysts in a Bloomberg poll, the pound could fall to $ 1.25 by the middle of next year if no trade deal is reached.
"It's going to be a tough week for UK investors," said Ned Rumpeltin, European head of foreign exchange strategy at Toronto-Dominion Bank. “However, the potential for a Brexit deal still remains. That could cause the declines to reverse just as quickly overnight if we get positive move. "
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