The pound fell off a cliff on Monday after France, Germany and others cut transport links with the UK amid fears of a new coronavirus strain, while Brexit talks reached another impasse.
Sterling dropped 2.1 per cent against the dollar to $1.323. It also fell 1.2 per cent versus the euro to €1.089. The FTSE 100 slid.
It came after Prime Minister Boris Johnson on Saturday tightened restrictions on England. He put London and much of the south in a new Tier 4 lockdown, forcing many businesses to close.
The Prime Minister said a key reason for his actions was a new strain of coronavirus that is estimated to be up to 70 per cent more infectious.
Fears of the new variant have prompted countries around the world to ban travel from the UK. France has curtailed freight transport across the channel, leading to miles of queues in Kent.
“Brexit trade deal talks remain stalled over the weekend, with time running out to approve a deal through by both sides before 31 December,” said Jeffrey Halley, senior market analyst at currency firm Oanda.
“Combined with European border closures and the UK health secretary using phrases such as ‘out of control’ to describe the new strain, sterling is, unsurprisingly, under pressure today.”
Brexit impasse hits pound
The pound’s fall against the dollar took it to a month-low. Yields on UK government bonds also fell as investors bought up the safe-haven assets. Yields move inversely to price.
A lack of progress in Brexit also weighed heavily on sterling. The UK and EU have blown through another self-imposed deadline. But the two sides still appear to be far apart on fishing and state-aid rules.
Investors are worried that the UK could well leave the Brexit transition period and be forced to trade with the EU on World Trade Organization terms. That would increase tariffs in key areas and add to uncertainty.
“The market is likely poorly positioned if the Brexit stand-off spills over into 2021 with no deal,” said John Hardy, head of FX strategy at Saxo Bank.
US stimulus deal boosts dollar
A stronger dollar was also a factor in the pound’s sharp fall. The greenback jumped one per cent against a basket of other currencies after lawmakers signed a $900bn (£678bn) stimulus deal that will offer direct financial support to many Americans.
Republicans and Democrats put aside their differences to agree to the bill yesterday. However, it is much smaller than Democrats initially hoped, making a further stimulus push likely once Joe Biden becomes president.
The pound’s fall cushioned the heavy blow to the FTSE 100, which was nonetheless down 2.7 per cent to 6,351 points. A lower pound flatters the overseas earnings of FTSE constituents.
European stocks were down sharply across the board. The continent-wide Stoxx 600 slumped 3.2 per cent.