The pound dropped to a 2021 low, and British markets slid into negative territory, after rumours that Prime Minister Boris Johnson was planning to unveil further COVID-19 restrictions drove investors to lower their expectations for an economic rebound.

Following reports that Britain could impose stricter COVID-19 measures, including recommendations to work from home, as early as Thursday, the FTSE 100 and FTSE 250 both turned negative, with airlines and leisure firms plunging dramatically.

"The pound is weakening as a result of potential Christmas COVID Plan B restrictions, leading to a reduction in Bank of England rate hike estimates for December," said Neil Jones, head of FX sales at Mizuho in London.

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IAG, the owner of British Airways, fell about 5%, while Cineworld fell 7.5%.

The sterling dropped 0.4% to $1.3186, the lowest level since December 2020. At 85.52 pence, it was down 0.56% against the euro.

Following the reports, the yield on 20-year gilts fell to its lowest level since February, while 10-year yields fell 4 basis points to their lowest since early September.

Interest rate futures showed a 45% likelihood of the Bank of England raising interest rates by 15 basis points at its December meeting, down from a 57% possibility earlier in the day.