GBP/USD knocked by London lockdown/new Covid-19 strain news, but still supported above 1.3300

• Cable continues to back off from Monday highs just under 1.3450 and now trades under 1.3350.
• News that London will be returning to tier 3 lockdown amid an outbreak of a new, more virulent Covid-19 strain hurt GBP.
• But sterling remains underpinned on Monday on hopes of a Brexit breakthrough as talks rumble on.

GBP/USD nearly managed to rally as high as 1.3450 on Monday during the European session morning but has in recent trade backed off and now trades back below the 1.3350 level amid a broad pickup in the US dollar from lows. Hurting the pair in recent trade has been the news that a new variant of Covid-19 is spreading in London and the city was confirmed to be going back into Tier 3 lockdown as a result. But the pair still trades over  100 pips or around 0.8% above its closing levels last Friday of below 1.3250, buoyed by hopes of a Brexit breakthrough as talks rumble on.

London lockdown, new Covid-19 variant

As rumoured over the weekend and throughout the European morning, London, the UK’s capital city which accounts for over 20% of national GDP, is to return to the UK’s highest tier of Covid-19 restrictions at midnight London time on Wednesday. UK Health Secretary Matt Hancock confirmed the rumours in the UK House of Commons just moments ago, but GBP was not too reactive.

However, GBP/USD did see some negative ticks when Hancock announced that scientists in the UK have identified a new Covid-19 strain that spreads “much faster”, with over 1000 cases already have been found in London. Hancock noted that there is no evidence to suggest that the new strain is going to be either deadlier or immune to the vaccine, but the news does raise the likelihood of stricter than currently anticipated lockdowns until the UK and other countries can get their populations mass vaccinated by the middle of next year.

Brexit talks: where things stand…

Last week, Sunday was being billed as an important day where, if no further progress in Brexit negotiations had been made, the EU and UK would have to make a serious decision about the future of talks. With UK PM Boris Johnson and EU Commission President von der Leyen agreeing that the responsible course of action is to continue to talks (and thus not agreeing to end talks as some had feared), GBP reacted positively at the re-open of FX trade during Monday’s Asia session.

Moreover, on the issue of governance, the EU is reportedly softening its stance on its right to implement “lightening tariffs” on the UK in the event a break of the level playing field agreement is perceived to have occurred and is thus moving a little closer to the UK position. But there is still no agreement yet on how the governance of the agreement should occur via independent arbitration, nor on the issue of fisheries.