LONDON (Reuters) - Sterling fell as much as 1% against a stronger dollar on Wednesday as a wave of risk aversion swept markets, prompted by a resurgence of COVID-19 cases in Europe and uncertainty ahead about the U.S. presidential elections.
COVID-19 deaths across Europe rose almost 40% in a week, challenging the narrative of a global economic recovery. Germany and France are preparing to announce new lockdown measures, following similar moves by Italy and Spain.
Euro zone shares fell and London’s FTSE 100 dropped to its lowest level in six months. The dollar index rose as much as 0.5% as investors sought safety.
“A temporary softening in the Brexit-related news flow and an empty data calendar will likely keep GBP as a bystander in global FX dynamics,” ING strategists said in a note to clients.
The pound fell as much as 1% against the dollar, before recovering some losses as the day’s moves eased. At 1553 GMT, it was at $1.3004, down 0.3% on the day, having fallen to as low as $1.2918 earlier. Versus the euro, it was up around 0.1%, at 90.31 pence per euro.
Sterling has been driven by Brexit developments in the past few weeks. Britain and the European Union have just over two months to reach a trade agreement before the status-quo transition period ends on Dec. 31.
The EU’s chief negotiator, Michel Barnier, is in London for negotiations, after which the talks will continue in Brussels.
Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, said that he expects Britain and the EU to “kick the can down the road” by prolonging talks or reaching a thin trade deal to avoid a chaotic no-deal Brexit in January.
“The market is taking as its base scenario that there will be some prolongation, in whatever form, which avoids these hard economic consequences,” he said.
A Bloomberg news report that Brexit talks had been making progress saw the pound briefly jump.
The Nov. 3 U.S. presidential elections are a major focus for markets.
Indicators of implied sterling-dollar volatility with one-week maturities rose to their highest since Sept. 14, a sign that traders anticipate heightened volatility in a week’s time.
Elsewhere, the chair of the UK vaccine task force said that the first generation of COVID-19 vaccines was “likely to be imperfect” and “might not work for everyone”, writing in medical journal The Lancet.
British researchers also said on Wednesday that there were significant problems with the availability and quality of COVID-19 data in England.
Reporting by Elizabeth Howcroft; Editing by Jane Merriman, Larry King, Pravin Char
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