The pound fell to its lowest level against the US dollar in more than two months, as the surge in COVID-19 cases undermined people's confidence in the UK's recovery.

The pound fell 0.9% against the US dollar at one point, hitting the lowest level of 1.3795 since April 16. Previously, the Federal Reserve turned hawkish to boost the dollar, while the UK added more than 11,000 new cases. The risk reversal indicator, which measures market positions, shows that the pound sentiment for the next month is in the most bearish state since April.

The UK reported 1,1007 new cases of COVID-19 in a single day, the highest since February 19

“Some of the optimism generated by the early introduction of the vaccine in the UK is waning,” said Jane Foley, head of foreign exchange strategy at Rabobank in London. “The increase in COVID-19 cases is clearly not good news. Coupled with other factors, this means the UK has been excluded from the EU's safe travel list.”

This is a setback for the pound, which has risen by about 1% this year and is only lagging behind the Canadian dollar in the G10. Britain's successful vaccination campaign and speculations that the Bank of England will raise interest rates sooner than its national peers have boosted the pound.

“An unincreased number of cases definitely doesn't help confidence,” said Jeremy Stretch, head of forex strategy at G-10, Imperial Bank of Commerce Canada.

The options pricing model shows that the current probability that the pound will fall to $1.20 before the end of the year is 21%, and the probability before the Fed's decision on Wednesday is 10%.