The pound declined to the weakest level in a month on concern a lockdown across England would deal a painful blow to an economy already reeling from similar measures earlier this year.
Sterling fell as much as 0.7% to $1.2855, the lowest since 7 October, after Prime Minister Boris Johnson on Saturday announced the month-long restrictions amid concern that the coronavirus is spreading rapidly and the National Health Service risks being overwhelmed.
It trimmed losses to trade 0.2% weaker as of 10:15 a.m. in London.
"Another lockdown is the worst-case scenario for the U.K. economy and the pound," said Lee Hardman, a foreign-exchange strategist at MUFG Bank. "It will increase pressure on the Bank of England (BOE) to deliver even more aggressive stimulus at this week's policy meeting."
Bloomberg Economics said the second lockdown will mean the economy contracts in the fourth quarter and that the BOE will increase its asset purchase target this week by possibly more than the 100 billion pounds ($129 billion) previously forecast. The central bank will decide on policy on 5 November, the same day the latest lockdown measures come into effect.
The shutdown is competing with a range of factors likely to influence the pound this week, from optimism about a breakthrough on Brexit trade negotiations with the European Union to the U.S. election on Tuesday. Uncertainty around the vote has driven the cost of hedging the pound over one week to its highest since April.
"I would expect that if it wasn't for hopes of a Brexit trade agreement that the pound would be a lot lower," said Jane Foley, head of foreign-exchange strategy at Rabobank, adding that a stronger U.S. dollar is exaggerating the latest move in the pound.