The pound (GBPUSD=X) had a turbulent start on Friday morning after leading scientists from the Scientific Advisory Group for Emergencies (SAGE) and the Scientific Pandemic Influenza Group on Modelling (SPI-M) proposed a second national lockdown in October.
The scientists, who are advising the UK government, said a two-week national lockdown could potentially coincide with the October school half-term, to tackle the rising number of coronavirus cases.
The news would undermine the government's efforts to avoid the re-closure of schools, following the national lockdown in March. Since then, schools have only fully reopened in autumn.
Sterling was up 0.8% against the dollar (GBPUSD=X) to 1.2979 and up 0.01% against the euro (GBPEUR=X) to 1.0955 by around 9:30 AM on Friday in London. The pound reached a six-month high against the dollar.
We’re seeing a “little bit of calm as this week’s talks end,” said European strategist, Chris Bailey of Raymond James Investment Services.
“Essentially all this [is] theoretically bad news for the currency (regional lockdown, negative rates, the inevitable Brexit) but still the pound is not doing too bad, especially against the dollar, which has its own challenges.”
On Friday, new measures affecting up to two million people came into force in the north-east of England, and ministers could be considering fresh restrictions for Leeds and Lancashire.
In some positive news, the UK has had a continued solid rebound in consumer spending after shops were allowed to reopen in June.
Retail sales registered their fourth month in a row of growth in August, the Office for National Statistics (ONS) said on Friday.
But, despite the uptick, the BRC warned last week that more job losses were likely in the UK retail sector as the majority of spending was going to online retailers at the expense of bricks-and-mortar shops.
“Government will need to act fast or September will see more shops close and more job losses realised,” BRC chief executive Helen Dickinson said last week.
On Thursday, EU Commission President Ursula von der Leyen shared words of encouragement, saying she was convinced a deal with the UK was still possible despite the “distraction” caused by Prime Minister Boris Johnson stating that he would be willing to violate the Brexit withdrawal treaty.
The pound soared higher following the news and recorded its best levels for the day after she said she was “convinced a EU-UK trade deal can still be done”, in a Financial Times interview.
"It is better not to have this distraction questioning an existing international agreement that we have, but to focus on getting this deal done, this agreement done - and time is short", Von der Leyen said.
Earlier on Thursday, sterling fell on news that the Bank of England was preparing to engage regulators on lowering interest rates to below 0% in coming months.
The pound could return to instability if tensions continue mounting between the UK and EU, especially if the UK presses forward with its plans to override elements of the Withdrawal Agreement's Northern Ireland Protocol.