Pound drops to two-month low as UK grapples with virus surge

The pound extended its decline to a two-month low as investors fretted over the possibility of a new lockdown in Britain.

The currency declined as much as 0.5% to $1.2676 after Foreign Secretary Dominic Raab said that he can’t rule out a nationwide shutdown. Government bonds rallied, sending the yield across tenors down about two basis points.

On Tuesday, Prime Minister Boris Johnson set new rules to curb the rise in coronavirus cases, including a 10 p.m. closing time for pubs and restaurants and a recommendation for office workers to work from home if they can.

These announcements don’t “inspire confidence in UK services or the economic outlook,” said Kenneth Broux, a strategist at Societe Generale SA in London. Strength in the dollar and short covering are another contributing factor to the pound’s weakness following hawkish comments from Chicago Fed President Charles Evans. The dollar is enjoying broad support from risk-averse bias in foreign-exchange markets.

Yet the pound’s fall could have been worse. Demand from speculative investors within the $1.2680 to $1.2700 range in sterling absorbed the first wave of selling by algorithms, according to a Europe-based trader familiar with the transactions, who asked not to be identified because he is not authorised to speak publicly.

The new UK restrictions have put an abrupt end to the government’s drive to open its economy and revive growth. The first nationwide lockdown that shuttered social and commercial activity in March triggered the UK’s worst recession in more than a century. But infection numbers have been spiking after the summer holidays, with daily confirmed cases around 4,000 over the past week.

Economic pain

The new restrictions unveiled by Johnson — combined with the withdrawal of some fiscal stimulus and risks of a messy exit from the European Union when the transition period ends — mean there could be no economic growth in either the fourth quarter or the first three months of next year, according to Bank of America Global Research.

The pound held onto losses after UK manufacturing data exceeded expectations while the key services PMIs fell short.

And if the government opts for a two-week shutdown of the UK hospitality sector, it may knock at least 2% off the nation’s gross domestic product and trigger further stimulus from the Treasury and Bank of England, according to JPMorgan Chase & Co.

Raab was “doing his best to sink the pound,” said Valentin Marinov, the head of Group-of-10 foreign exchange strategy at Credit Agricole.