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Sterling swoons as new lockdown weighs on struggling economy

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Jan 5 (Reuters) - The British pound steadied on Tuesday but held well below a more than 2-1/2 year high of $1.37 hit in the previous session as a new lockdown deflated post Brexit-deal optimism.

Prime Minister Boris Johnson ordered England into a new national lockdown to contain a surge in COVID-19 cases that threatens to overwhelm parts of the health system before a vaccine programme reaches a critical mass.

The new measures which could cost about 10% of economic output for as long as they last, according to some analysts, deflated any lingering bullishness around the British currency and sent it tumbling 1% from the May 2018 highs.

“The successful conclusion of the Brexit talks offered just a momentary breather with the pound back into the dumps after Johnson ordered a third economically disastrous national lockdown for England,” said Marshall Gittler, a strategist at BDSwiss Group.

In early London trading, the pound was trading at $1.3560, up 0.1% versus a broadly weak U.S. dollar. Against the euro, the pound was 0.4% weaker at 90.51 pence.

The expected hit on the economy heaped up expectations on the Bank of England to announce more policy easing.

Money markets now expect the central bank to cut benchmark interest rates as early as May compared with an August estimate just after the Brexit deal was struck.

The pound had strengthened against both the dollar and euro after the Dec. 24 Brexit trade deal, which set rules for fishing, agriculture and other industries.

Despite the pound’s gains in recent days, market participants are not bullish on the currency’s prospects. Net long bets on the pound against the U.S. dollar are a fraction of what they were at their 2020 highs.

Reporting by Saikat Chatterjee Editing by Robert Birsel

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