Pound dives as COVID-19 restrictions ramp up on Brexit deadline day

The pound sold off on Thursday, as COVID-19 restrictions were ramped up across the UK and as Brexit talks reached a crunch deadline.

The pound slipped against the dollar and euro around lunchtime on Thursday. Sterling was down 0.4% against the euro (GBPEUR=X) to €1.1025 by 12.20pm and was down 0.7% against the dollar (GBPUSD=X) to $1.2921.

The fall came shortly after the UK’s health secretary confirmed restrictions would increase across multiple regions of the UK from Saturday, including London.

London will be upgraded to ‘Tier 2’ restriction status to curb the spread of COVID-19. Households will be banned from mixing indoors, although pubs and restaurants will be allowed to stay open.

While businesses can continue to operate, the ban on mixing indoors is likely to significantly hit demand. Robert Hayton, head of UK property tax at advisor Altus Group, said the restrictions “could be the death knell” for London’s more than 10,000 pubs, bars, and restaurants.

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Prior to the announcement, the pound had been holding its ground against the euro and suffering softer losses against the dollar. Investor attention had been focused on Brexit negotiations, which are entering a crucial stretch.

Last month UK prime minister Boris Johnson set a deadline of 15 October – today — to reach a trade deal with the EU or pledged to walk away from talks. Recent press briefings suggest talks could drag on till the end of October or early November.

Watch: Coronavirus restrictions tighten in London

“In our view, neither the UK prime minister’s 15 October deadline nor the European Commission’s 31 October deadline constitutes a hard stop on Brexit negotiations,” Goldman Sachs economist Adrian Paul wrote in a note sent to clients on Thursday.

“This week’s European Council may well feature an additional dose of political drama, but we read more into the cautiously constructive tone of Wednesday’s bilateral meeting between PM Johnson and President von der Leyen.”

Paul said he expects “a ‘thin’ zero-tariff/zero-quota trade agreement will likely be struck by early November, and subsequently ratified by the end of the year.”

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