Sterling fell on Tuesday as Britain remained stuck in COVID-19 isolation due to a new coronavirus strain, although hopes of progress in Brexit talks helped to take some pressure off.
European Commission President Ursula von der Leyen and British Prime Minister Boris Johnson spoke on disagreements over fisheries that are barring a new trade deal, as well as the latest on coronavirus, in a call on Monday, sources said.
EU sources added that the bloc was now willing to accept a reduction in the value of its catch in UK waters of up to 25% over a period of time from 2021.
With days to the end of a Brexit transition period on December 31, the pound had fallen below $1.32 on Monday as much of the world closed borders to the United Kingdom after London identified a highly infectious coronavirus strain.
The pound was 0.4% lower against the dollar at $1.3422 by 1124 GMT, after weakening by as much as 2.5% to $1.3190, a 10-day low, on Monday.
Against the euro, sterling was down 0.25% at 91.11 pence, after it fell to as much as 92.16 on Monday.
Jane Foley, head of FX strategy at Rabobank, said sterling found some support from reports that the UK and the European Union “could be closing in on a compromise regarding fisheries” – one of the sticking points in the Brexit negotiations.
But the currency is expected to continue to be volatile even with a Brexit deal amid new lockdowns and border closures, Foley added.
“While a Brexit deal would be a huge move forward, any relief rally in the pound is likely to be tempered by the reality that many sectors will remain outside the reach of any deal and by the concerns over the impact on the economy of the current tier 4 restrictions and border closures,” she said.
The EU’s Brexit negotiator, Michel Barnier, will give an update on Brexit talks to the bloc’s 27 national envoys at 1500 GMT.
Official data showing that Britain’s economic recovery from the pandemic was quicker than expected in the third quarter also helped to support the currency.
UK Home Secretary Priti Patel told Sky the government is working with France in an attempt to find a way to lift border closures that have snarled one of Europe’s most important trade routes.