Sterling falls as Europe's COVID-19 resurgence limits risk appetite


By Elizabeth Howcroft

LONDON, Oct 28 (Reuters) - Sterling fell 1% against a stronger dollar on Wednesday as a wave of risk aversion swept markets, prompted by a resurgence of COVID-19 cases in Europe and uncertainty ahead of the U.S. presidential elections.

COVID-19 deaths across Europe rose almost 40% in a week, challenging the narrative of a global economic recovery. Germany and France are preparing to announce new lockdown measures, following similar moves by Italy and Spain.

Euro zone shares fell and London's FTSE 100 dropped to its lowest level in six months .FTSE. The dollar index rose around half a percent as investors sought safety =USD.

"A temporary softening in the Brexit-related newsflow and an empty data calendar will likely keep GBP as a bystander in global FX dynamics," ING strategists said in a note to clients.

The pound fell as much as 1% against the dollar. At 1248 GMT, it was at an eight-day low of $1.2922 GMT GBP=D3. Versus the euro, it was down around 0.4%, at 90.75 pence EURGBP=D3.

Sterling has been driven by Brexit developments in the past few weeks. Britain and the European Union have just over two months to reach a trade agreement before the status-quo transition period ends on Dec. 31.

The EU's chief negotiator, Michel Barnier, is in London for negotiations, after which the talks will continue in Brussels.

Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, said that he expects Britain and the EU to "kick the can down the road" by prolonging talks or reaching a thin trade deal to avoid a chaotic no-deal Brexit in January.

"The market is taking as its base scenario that there will be some prolongation, in whatever form, which avoids these hard economic consequences," he said.

The Nov. 3 U.S. presidential elections are a major focus for markets.

Indicators of implied sterling-dollar volatility with one-week maturities rose to their highest since Sept. 14, a sign that traders anticipate heightened volatility in one week's time, which will be the day after the U.S. election GBPSWO=.

Euro-sterling one-week volatility also rose, but only to its highest since last Thursday. EURGBPSWO=.

Analysts also cited a study from Imperial College London, which suggested protection from the coronavirus may not be long-lasting, as a reason for reduced risk appetite.

Also, the chair of the UK's vaccine task force said that the first generation of COVID-19 vaccines is "likely to be imperfect" and "might not work for everyone", writing in medical journal The Lancet.

British researchers said on Wednesday that there are significant problems with the availability and quality of COVID-19 data in England.

Sterling one-week volatility

(Reporting by Elizabeth Howcroft; editing by Jane Merriman, Larry King)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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