Sterling holds above $1.30 despite new lockdown measures

LONDON (Reuters) - Sterling edged higher on Monday as hopes for a Brexit deal kept the currency above the key $1.30 level, after British Prime Minister Boris Johnson announced new coronavirus restrictions.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo

Johnson set out a three-tier system of local lockdown measures in England, including a ban on households mixing indoors in some areas, designed to curb the spread of coronavirus.

New lockdowns will add pressure to the UK economy, which grew at the slowest pace in August since it began to recover in May from its record slump, but analysts said markets have turned more optimistic about Brexit negotiations.

Sterling was up 0.3% at $1.3083 at 1524 GMT, above the one-month high it touched on Friday. Versus the euro, it gained 0.4% at 90.29 pence.

The “biggest surprise” is sterling starting the week in a “positive tone”, holding above $1.30, despite COVID-19 headlines and the lack of “constructive news flow” on a Brexit deal, said Ulrich Leuchtmann, FX strategist at Commerzbank.

Johnson had set a deadline of the Oct. 15 EU summit for agreeing a trade deal and Britain’s chief negotiator David Frost is in Brussels for intensified talks with the EU.

But markets have taken the view that the UK will try to avoid storming out of the room and will continue talking beyond the deadline.

“Stumbling out while COVID-19 cases are soaring could spark a renewed recession and millions of unemployed,” Derek Holt, vice-president at Scotiabank Economics, wrote in a note.

Leuchtmann said even if talks would likely continue, there were still political risks that the market hasn’t priced in appropriately.

“Understandably, all market participants believe this is all a kind of political game-play,” he said. “I would be more calm if the market was a little bit more nervous.”

Reports showed that the EU wanted more concessions from Britain before entering the last intense phase of negotiations.

In the meantime, the Bank of England asked banks on Monday how ready they are for zero or negative interest rates, while BoE policymaker Jonathan Haskel said the central bank had an “absolutely open mind” about the possibility of sub-zero rates as part of its support for Britain’s economy during the coronavirus crisis.

Britain recorded 13,972 new cases of COVID-19 on Monday, compared with 12,872 the day before, and has registered 42,875 deaths.

Cable holds above key level:

Reporting by Joice Alves,; Editing by Susan Fenton and Ed Osmond