Pound hovers near two-month lows after new COVID-19 restrictions

LONDON (Reuters) - Sterling hovered near two-month lows after gyrating in volatile trading on Tuesday as British Prime Minister Boris Johnson unveiled long-lasting restrictions to tackle a second wave of the coronavirus.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/Benoit Tessier/File Photo

New measures, which included extending the use of face coverings, curfews on pubs, bars and restaurants and larger fines for rule-breakers, could be in place for six months, Johnson warned.

“Service is a very important component of the UK industry and leisure and hospitality is the services sector and restrictions will mean less revenues and more pain,” said Kenneth Broux, FX strategist at Societe Generale.

“As a component to GDP, it also diminishes the bounce-back that we may get.”

The pound was last down 0.5% at $1.271, the lowest since late July, giving up earlier gains of as much as 0.13% against the dollar.

Graphic: GBP prices

The pound was at 92 pence against the euro.

“Sterling’s slide at the beginning of the European session today underpinned the concerns that the investors have for the UK economy, which is right in the middle of this,” said Gavin Friend, senior FX strategist at NAB Group.

The pound recovered a bit in late morning trading after Bank of England Governor Andrew Bailey said the latest policy statement did not imply the BOE would necessarily use negative interest rates, and that observers should not read too much into it.

Latest weekly positioning data show a small long position in favour of the British pound, but the magnitude of the long bets is barely above zero and is far below the highs of nearly $2.8 billion in March.

However, the positioning data is at odds with signals from the derivative markets which point to more weakness for the pound. Three-month risk reversals, a ratio of calls to puts for the currency, are approaching 2020 lows.

“The UK also has some pretty unique challenges with Brexit,” Friend said. “If a deal is struck, sterling is going to rally hard, and if there isn’t, sterling is going to be vulnerable. That’s why markets are very flighty on sterling.”

The British government is attempting to pass a bill through Parliament that would allow it to break its Withdrawal Agreement with the European Union.

EU chief negotiator Michel Barnier is expected to visit London on Wednesday as part of continuing informal talks on Britain’s exit from the bloc.

“If we get good news from Barnier in the next couple of days, then we could go back up to $1.30 but investors don’t really know which way to turn until there is a bit more clarity,” said Broux.

Graphic: GBP positions

Reporting by Maiya Keidan, additional reporting by Thyagaraju Adinarayan and Saikat Chatterjee; Editing by Larry King, Alison Williams and Emelia Sithole-Matarise