Updated: Dec 29, 2020
Not only the uncertainty of Brexit negotiations, more trouble for the £.
Closed ports and harsh new lockdowns across most of the UK have combined with a lack of progress in Brexit trade negotiations to send the British Pound sharply lower.
The Pound experienced its largest one-day drop since March after EU countries on Sunday closed their borders with the UK over fears that a new strain of covid-19 would travel from the UK onto the continent.
Forex traders again are benefitting for the sharp swings and volatility, and Sterling's devaluation was compounded by the Dollar and the agreement of the second biggest stimulus package ever, to aid the US economy.
France initiated the strictest measures by blocking entry to UK hauliers, causing notable tailbacks at Dover and threatening UK exporters. France's Transport Minister however said late morning on Monday that they are intending to, in the coming hours, set up a European wide mechanism to allow traffic with the UK to resume.
Alarm over a more contagious strain of SARS-CoV-2 (the virus which causes the covid-19 disease) is believed to have originated in the South East of England and scientists say it is up to 70% more contagious than other strains. However, some reports out on Monday say it was first identified in Brazil earlier in the year.
"The risk from this strain is at the very worst that current vaccines may not prove as effective (this is as yet unknown), but at the very least that it makes any level of activity normalisation that much more difficult until vaccinations are sufficiently rolled out," says John Hardy, Head of FX Strategy at Saxo Bank.
"We continue to expect GBP to underperform in a G10 context, and think Sterling will barely make gains even against a broadly soft USD in the months ahead," says Dominic Bunning, Head of European FX Research at HSBC.
Covid developments come as the EU and UK miss another deadline for trade talks amidst protracted deadlock over the matter of post-Brexit fisheries access.
Richard Pace, a Reuters market analyst says the market odds of a 'no deal' Brexit appear to have risen over the weekend as a result.
According to the Smarkets betting exchange, odds of EU/UK trade deal in 2020 have fallen back below 50%, probability of a deal now 47% - it was 72% on Friday, notes Pace.
“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.
Experts say uncertainty over the new strain of the virus and its effect on firms has been further compounded by fears of a no deal Brexit.
Investors were spooked earlier as another Brexit deadline went past without results and Britain’s biggest port in Dover stopped all traffic heading to the continent, threatening the U.K.’s supply chains with Europe. The currency’s one-week implied volatility was the highest for a Christmas period in more than a decade.