The pound has started the week lower following the headline news of a worsening ‘mutant’ COVID-19 strain leading to further government restrictions and Europe cutting off travel and Channel trade with the UK. On Saturday Boris announced a new Tier 4 system for London and much of the South East, restricting travel and effectively cancelling Christmas, tearing up the previous plans that would have allowed millions to enjoy a Christmas with loved ones.

The fears over the strain have led to France closing the British/French border blocking all travelers coming back to the UK and those leaving the UK for the continent. There has also been a travel ban from the UK to many European countries in a bid to prevent the spread of the mutant strain which is 70% more infectious and has led to a 50% surge in UK cases in a week.

Matt Hancock speaking to Andrew Marr show indicated this Tier 4 system might well continue for months and he could not rule out further lockdowns as this strain appeared to be ‘out of control’. In signs familiar of the thousands pouring onto Bournemouth beach in the summer, and Oxford Street shopping last week, many were pictured out shopping yesterday and loading onto trains to escape the new Tier 4 restrictions in the South East.

GBP Falls From Recent Yearly Highs

Sterling Slides

GBP is unsurprisingly lower on this news, currently trading at lows of 1.0903 so far against the Euro on the interbank rate, down from the highs of 1.1130 seen last week. GBPUSD is currently 1.3264, down from the 1.3625 peaks of last week.

The travel ban for the UK has added to a busy situation at British Ports as increased stockpiling had been taking place in a very busy week before Christmas but also ahead of the December 31st Brexit deadline just 10 days away.

The pound is also struggling on Brexit fears as another weekend passed with no deal agreed and the two sides appearing very far apart still on the contentious issue of fishing. Britain has requested the EU drop its ‘unreasonable’ demands’ on fishing according to the Times today and the European parliament’s deadline to agree deal came and passed last night with no progress.

New Brexit deal Deadline - Will a Brexit deal be agreed and how will the pound react?

With talks on a Brexit deal appearing to stumble once again, the prospect of a no-deal looks more likely and the pound has reacted accordingly, falling as we enter this week. With the pound having risen last week on signs of optimism of a deal there might well be further to fall if the no-deal scenario becomes more likely this week.

The Sunday Times quoted Simon French, economist at Panmure Gordon, stated the pound could “lose 10 cents and fall to the mid $1.20s” if talks are abandoned. The paper also reported yesterday comments from Paul Dales of Capital Economics, that “the risks to the pound lie on the downside.”, in reference to how a deal might not generate much of a rally but no deal would “send it down quite sharply”.

December 31st is a week on Thursday when the transitional phase will end, and the UK will technically be leaving the EU with no deal in place. From today, there are 11 days left to finalise a deal and have it ratified by the relevant member states.

The 28th December had been the date for the emergency European parliamentary session to ratify the deal, but this could be in jeopardy now following no agreement being reached by yesterday.

Matt Hancock has stated Christmas is the UK’s new deadline for a deal, which will give it time to ratify it in the House of Commons, although the European parliament might have to ratify their side in the New Year now. Whilst time is running out this does not necessarily mean it will be no-deal as there could still be time for a last-minute loose agreement or arrangement to avoid no-deal and leave the door open to finalise certain issues in the New Year.

Michel Barnier has seemed more positive on the topic saying talks would continue despite last night’s deadline passing, although he acknowledged talks were at a crucial moment.

All in all this shorter week ahead for the currency markets seems to have lots of potential for a volatile few days as investors react to the latest news on Coroanvirus and also Brexit. With Brexit still to be finalised and the markets keen to understand the direction of the Coronavirus pandemic, the pound could be in for some turbulent times.

Keep in touch with our expert team during this busy period as we assist you to navigate the currency markets and your international payments in these crucial end days of 2020.

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