LONDON: Sterling touched a one-week low on Monday as headwinds in the banking sector dented investors' risk appetite, while rising Covid-19 cases prompted Britain to consider a second national lockdown.
The pound was down 0.9% against the dollar at $1.2797 by 1309 GMT GMT, hitting the lowest point in a week.
Versus the euro, sterling was down 0.1% at 0.9179.
A slide in the banking sector set British blue chip companies on course for their worst day in more than three months after reports that some London-listed banks were among those that moved allegedly illicit funds over the past two decades.
"This sort of retreat to risk sentiment which is being led by the banks is causing headwinds for sterling," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.
Analysts suggested the pound has been behaving over the past months like a "risk currency", in that it weakens when market sentiment deteriorates.
Reports that Britain was pondering a second lockdown also contributed to the risk-averse narrative.
Chris Whitty, the government's chief medical officer, and Patrick Vallance, its chief scientific adviser, cautioned that if left unrestricted the epidemic in Britain would reach 50,000 new cases per day by mid October.
New Covid-19 cases were rising by at least 6,000 per day in Britain and the testing system was buckling in a country that already has the biggest official Covid-19 death toll in Europe at 41,777 people.
"We're in an environment where the risks of additional lockdowns are building and obviously that's creating sort of different pressures or difficulties for the recovery story," Stretch said.
The prospect of a chaotic end to the Brexit transition period in December if Britain fails to agree a trade deal with the EU also continues to hang over sterling.
"Brexit talks will remain the key driver this week and we see the complacent GBP still facing sizeable downside risk as no-deal is gradually priced back in," analysts at ING wrote in a note to clients.
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