UPDATE 1-Sterling struggles to regain 2-1/2-year peak as new lockdown weighs

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates prices, adds details)

LONDON, Jan 5 (Reuters) – The British pound steadied on Tuesday but held well below a more than 2-1/2-year high of $1.37 hit in the previous session, as a new lockdown deflated optimism from a post-Brexit trade deal with the European Union.

Prime Minister Boris Johnson ordered England into another national lockdown to contain a surge in COVID-19 cases that threatens to overwhelm parts of the health system before a vaccine programme reaches a critical mass.

The new measures, which could cost about 10% of economic output for as long as they last according to some analysts, deflated any lingering bullishness around the British currency and sent it tumbling 1% from its highest levels since May 2018.

“The pound has failed to display much of a relief rally in the wake of the pre-Christmas trade deal between the UK and the EU, with the rise of COVID-19 cases and greater restrictions on the UK economy becoming a concern,” Rabobank strategists said.

In late London trading, the pound was changing hands at $1.3593, up 0.3% versus a broadly weaker dollar. Against the euro, the pound was broadly flat at 90 pence.

The expected hit to the economy heaped expectations on the Bank of England to announce more policy easing.

Money markets now expect the central bank to cut benchmark interest rates as early as May, compared with an August estimate just after the Brexit deal was struck.

The pound had strengthened against both the dollar and euro after the Dec. 24 Brexit trade deal, which set rules for fishing, agriculture and other industries.

But despite the pound’s gains in recent days, market participants are not bullish on the currency’s prospects. Net long bets on the pound against the dollar are a fraction of what they were at their 2020 highs.

Moreover, though bullish pound bets have registered a fourth consecutive week of gains, the size of the gains in the latest week is far smaller than previous weeks.

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