The pound weakened versus the euro on Britain's first day of trading outside the European Union, as warnings of tighter UK lockdown measures outweighed the relief over the last-minute Brexit trade deal.
Sterling did strengthen against the dollar, even briefly breaking above $1.37 for the first time since 2018 in early London trading, but the move was more driven by dollar weakness than idiosyncratic sterling strength.
At 11am on Monday, the pound changed hands at 89.81 pence versus the euro, down around 0.5 per cent on the day.
The pound had strengthened against both the dollar and euro after the December 24th Brexit trade deal, which set rules for fishing, agriculture and other industries.
Although the deal does not cover Britain's finance sector, UK market participants were relieved by an extension which allows them to use platforms in the European Union for swaps trading until March 2021 - a move announced on Thursday in a bid to avoid disruption.
But Covid-19 cases in Britain have been hitting record levels. British prime minister Boris Johnson said on Sunday tougher lockdown restrictions were probably on the way. Britain's health minister said on Monday that nothing was ruled out.
Commerzbank's head of FX and commodity research, Ulrich Leuchtmann, said sterling's rally after the Brexit trade deal was “disappointingly limited”, but that it has further scope for gains in the next few days as traders adjust their positioning upon their return from holiday.
Beyond that point, Leuchtmann was less bullish.
“For market participants with a long-term outlook the concern that Brexit might constitute the beginning of renewed economic decline in the UK is more likely to dominate,” he said.
