GBP/USD: New covid strain, a sterling's nightmare before Christmas – MUFG

The pound has weakened sharply following the release of further details about the new strain of COVID-19 that has been detected in England. The new covid variant challenges optimism over stronger global recovery and dampens sterling’s appeal in the end of the year, per MUFG Bank.

Key quotes

“The new strain ‘B.1.1.7 lineage’ may be as much as 70% more transmissible according to preliminary analysis. Virus samples have already been found in the UK, Denmark, the Netherlands, Belgium and Australia.” 

“The new strain has already triggered a spike in new COVID-19 cases in the South of England prompting the UK government to place much of South East England, the east of England and London into tougher Tier 4 restrictions including shutting non-essential shops and personal services again and restricting travel between regions in attempt to slow the spread of the new virus strain across the country. In time the new Tier 4 restrictions will be imposed across the rest of the country as the new strain continues to spread.”

“The new tougher restrictions will likely have to remain place until there has been greater vaccine roll out which could take months. We are working on the assumption that vaccines will still prove effective against the new strain but it is not yet clear. As a result, the economic slowdown will prove deeper and extend further into next year. It will dampen optimism over a stronger economic recovery in 2021. More stimulus will be required to support the economic recovery which will increase speculation that the BoE will introduce negative rates early next year.”

“The negative developments clearly have increased downside risks for the UK economy and the pound, and will dampen the scope for any gains on the back of a Brexit trade deal before year end. The failure to contain the less contagious covid strains does not give us much hope that the new strain will not spread across the world creating similar disruption as in the UK. It provides some much needed relief for the US dollar following the recent heavy sell off.”