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  • GBP/USD continues to recover from its earlier sub-1.3200 lows, the pair currently trading just under 1.3350.
  • However, sterling is still the worst performing G10 currency on the day as a no-deal Brexit looms and new Covid-19 strain rages.

GBP/USD has continued to crawl higher in recent trade and has now managed to recover back to 1.3350, a decent more than 150 pip turnaround from earlier lows at 1.3188. At present, the pair trades with losses on the day of around 1.2% or well over 150 pips.

Pound sterling is the worst performing G10 currency on the day amid a double whammy of 1) Brexit angst and 2) concerns regarding the spread of this newly discovered, much more virulent strain of Covid-19 in London and the South East.

Brexit and Covid-19 delivery double whammy to GBP

The UK Parliament is reportedly set to set next Wednesday (30 Dec) if a Brexit deal is agreed, said government sources to the Telegraph, with the aim being for any EU trade deal bill to pass both chambers and receive Royal Assent in one day. Though UK lawmakers might be primed and ready to ratify any deal in record time, that does not mean a deal has been reached. On the contrary, as noted by the UK PM earlier during Monday’s European afternoon, significant gaps still remain in the negotiations and the government’s position remains that there will be no extension to the transition period, despite calls by UK MPs and an EU that would likely agree to the idea if push came to shove.

There are worrying signs that the two sides might already be focusing on playing the “blame game” regarding the failure of negotiations to get a deal; Eurasia Group reported that Senior EU officials are pushing back “very hard” on the idea being pushed by the UK that the only outstanding issues are now fisheries and the “French”. At this point, each day that goes by without progress towards a deal, the more GBP is likely to be hit, making for a potentially explosive end to the year for FX markets.

Elsewhere and arguably delivering a more significant blow to GBP versus its G10 peers on Monday is this weekend’s Covid-19/lockdown news out of the UK; the UK government announced that large portions of London and the South East of the UK will be going into a new tier 4 lockdown, which is akin to the national lockdowns seen in H1 2020 and November, as the area struggles to contain the outbreak of a new, more virulent strain of Covid-19 that UK scientists fear could increase the virus reproduction rate by more than 0.4 (in the UK the R rate was last week estimated at between 1.1-1.2, implying that is how many persons each infected person spread the virus too).

Much of the recent surge in cases in London and the South East is being attributed to the spread of this new strain and governments around the world have taken swift action in banning incoming travel from the UK. The French even temporarily halted freight, contributing to the massive queues of lorries being seen at UK ports, raising fears of short-term food supply shortages. This freight ban is expected to soon be lifted, however. Mixed reports allege that an EU-wide UK travel ban is set to be maintained, however. Given that cases of the new virus strain are already being detected in Denmark, the Netherlands and Italy, it might be too late for the continent to avoid an outbreak.

BoE primed for negative rates in 2021

It seems increasingly likely that the UK is about to end 2020 in a worst-case economic scenario; a no-deal Brexit, which will erect tariffs and trade barriers between the UK and its most important trade partner, the EU, seems the most likely outcome. Moreover, a more virulent strain of Covid-19 is on the loose right at a time of year when social contacts are at their highest (people visiting their family members for Christmas). Covid-19 cases might be about to surge across the country and more counties plunged into Tier 4 lockdown just as the UK begins to trade with the EU on economic sub-optimal WTO terms.

Such a cocktail of events is not going to go unnoticed at the BoE, who have refused to keep the option of negative rates off the table. In the past, senior Monetary Policy Committee members (Governor Andrew Bailey and Chief Economist Andy Haldane) have pushed back against the idea of negative rates as unlikely. But that has not stopped the bank from conducting its year-long review and contacting the UK banking system regarding its preparedness to a shift to negative.

Indeed, a number of Bank of England Monetary Policy Committee have already given negative rates the nod; last week Gertjan Vlieghe said negative rates might be needed for a “full recovery” and Silvana Tenreyro is on the record as noting that negative rates can be helpful. Morgan Stanley, for one, think that in a no-deal scenario, the UK would take rates negative in 2021 and up the rate of QE purchases.

Given that money market pricing at present does not reflect any probability that UK interest rates will go negative in 2021, even a small shift in money market pricing could add further pressure to GBP.