LONDON(Reuters) - Sterling steadied near two-week lows against the dollar and euro on Monday as fears of a second wave of coronavirus hit risk sentiment and global markets, with investors also nervous ahead of a key meeting on Brexit negotiations.
A fresh coronavirus outbreak in China and rising infection numbers in the United States — even as major economies have begun lifting lockdowns — put financial markets on the back foot at the start of the week, with selling of stocks and risk currencies across the board.
The pound also took a beating, falling for a third straight session to as low as $1.2455 — its lowest since June 1 — in Asian trading hours. It last steadied against the dollar at $1.2548 by 1604 GMT, up 0.1%.
It also rose 0.1% to the euro, at 89.80 pence.
“The pound remains highly sensitive to changes in the external risk environment and is likely to continue trading on a corrective path lower, in line with cross-asset markets,” said Viraj Patel, FX and global macro strategist at Arkera.
“The curveball provided by intensified Brexit talks today is unlikely to offset the gloomy outlook — however, we expect the pound to remain sensitive to any headline Brexit risks over the coming weeks.”
Leaders from Britain and the European Union agreed on Monday that talks on their future relationship should be stepped up to clinch a deal, with Prime Minister Boris Johnson suggesting an agreement could be reached in July with “a bit of oomph”.
Earlier, after a video conference between Johnson, European Commission President Ursula von der Leyen and the leaders of the European Council and European Parliament, the two sides said they “agreed ... that new momentum was required”.
With a status-quo transition deal set to run out at the end of the year, Britain is seeking a free trade agreement with the EU, which it left on Jan. 31, but negotiators have so far made little progress.
“We are sceptical that the two sides will find a breakthrough in the deadlocked negotiations especially on a possible extension of the transition period, which expires at the end of the year,” said Lars Sparresø Merklin, senior analyst, FX strategy in a note to clients.
“This extension needs to be agreed upon before 1 July if the two sides should be able to extend the transition period at a later stage in the fall.”
Speculators reduced their net short position on the pound in the week to last Tuesday, data from the Commodity Futures Trading Commission showed. [IMM/FX] [CFTC/]
This week, investors also will look ahead to the Bank of England’s meeting on Thursday, where it is expected to announce a fresh increase of at least 100 billion pounds ($126 billion) in its bond-buying firepower.
Bank of England Governor Andrew Bailey said the British central bank had to be ready to do more to help the country’s economy because of the risk of long-term damage caused by the coronavirus shutdown.
Reporting by Ritvik Carvalho; Editing by Catherine Evans