Sterling and stocks tank briefly on reports of new UK restrictions

LONDON (Reuters) -The pound fell to a 2021 low and British stocks briefly sank into negative territory on Wednesday after reports that the UK government was set to announce new COVID-19 restrictions prompted investors to dump riskier assets.

Sterling sank 0.5% to its lowest level at $1.3162 versus the dollar since December 2020, after media outlets reported Britain could implement tougher COVID measures, including advice to work from home, as early as Thursday.

The pound also weakened 0.7% against the euro to 85.66 pence at 1347 GMT, after touching an almost four-week low against the single currency.

Though the pound retraced some losses against the dollar and the euro subsequently, it remains firmly in negative territory.

In a highly volatile session, London stocks, which fell on potential new restrictions plans, bounced back as vaccine makers BioNTech and Pfizer said three shots of their COVID-19 vaccine were able to neutralise the new Omicron variant.

“There are a lot of rumours swirling around possible new restrictions in the UK… But the Pfizer data is encouraging and underlies the fact that Omicron won’t be that bad,” said Neil Wilson, chief market analyst at Markets.com.

Roll back

London’s FTSE 100 and FTSE 250 edged up around 0.2% and 0.1% respectively, with airlines and leisure stocks cutting some of the losses by 0.4% after tumbling as much as 2.7% in earlier trading.

Shares in restaurant and pubs owner Restaurant Group fell 6%, while British Airways owner IAG dropped 3% and cinema operator Cineworld plunged 4.5%.

But vaccine news failed to meaningfully lift the pound as traders said new restrictions could encourage the Bank of England to keep interest rates unchanged at its Dec. 16 meeting.

“The pound is selling off on potential Christmas COVID Plan B restrictions generating a roll back on Bank of England rate hike expectations for December,” said Neil Jones, head of FX sales at financial institutions at Mizuho in London.

The yield on 30-year gilts hit its lowest since January while 10-year yields dropped 4 basis points on the day to their lowest since early September. Much of the fall in yields reversed after the BioNTech and Pfizer vaccine updates with yields trading higher on the day.

Interest rate futures showed a 45% chance of a 15 basis-point interest rate rise by the Bank of England at its December meeting, down from a 57% chance earlier on Wednesday.

(Reporting by Joice Alves, William Schomberg, David Milliken and Julien Ponthus; Editing by Saikat Chatterjee and Jonathan Oatis)