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Pound and stock markets in turmoil as Europe closes borders to UK

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Written by: Emma Lunn
21/12/2020
Sterling and the FTSE have suffered sharp drops after an increasing number of European countries banned UK arrivals amid a new strain of coronavirus.

Denmark, Norway, The Netherlands, Belgium, Austria, Germany, Bulgaria, Lithuania, Latvia and Estonia are among a growing list of countries which have banned flights arriving from the UK or put other travel restrictions in place.

The move is in response to a new fast-spreading mutant strain of Covid-19 causing London and large areas of the South East to be moved into new Tier 4 restrictions as the government admits coronavirus is out of control.

Data from Whole Genome Sequencing, epidemiology and modelling suggest the new variant ‘VUI – 202012/01’ transmits more easily than other strains.

Meanwhile Brexit talks have stalled, making it probable that the UK will leave the EU without a deal.

Sterling dipped by as much as two and a half cents against the US dollar to less than $1.33 on Monday morning, with the FTSE 100 opening more than 130 points, or 2%, lower.

Olivier Konzeoue, FX sales trader at Saxo Markets, said: “A new strain of Covid-19 deemed to be 70% more contagious, pushing the UK government to put new lockdown measures in place, combined with stalling Brexit talks make for a rather toxic mix that weighs on the great British pound.

“Let’s keep in mind seasonality will be a factor as liquidity typically gets thinner going into the end of the year, potentially causing more extreme moves. The sudden drop from GBPUSD 1.35 area to 1.3278 not only illustrates this phenomenon, but also shows markets are not positioned for a cliff-edge breakup between the UK and Europe. No doubt headline risks will keep sterling under pressure in the coming days.

Richard Hunter, head of markets at Interactive Investor, said: “The new coronavirus strain is weighing heavily on sentiment as the UK’s isolation from Europe becomes increasingly physical as well as conceptual.

“With some cases also being reported outside of the UK and with several countries suffering fresh spikes in cases and resorting to further lockdowns, the stark reminder is that until the vaccine rollout reaches a sufficient level, little can be done to defeat the virus.

“Against this backdrop, investors are far less likely to commit fresh capital to the market, especially in the last few trading days of the year. For the UK, the introduction of a new Tier 4 pandemic level accompanies an ongoing stalemate in Brexit negotiations, with talks set to extend yet again.

“This double whammy has led to a weak open, with the FTSE100 taking a further hit and now down by 15% in the year to date. Despite the major indices losing some ground, the year-to-date performances remain firmly in positive territory, with the Dow Jones up by 5.8%, the S&P500 14.8% and the Nasdaq 42%.”

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