September 7, 2018 / 8:40 AM / 2 months ago

Sterling drifts up but set for biggest drop in 3 weeks on trade fears

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Sept 7 (Reuters) - Sterling edged higher on Friday but was set for its biggest weekly drop in three weeks as traders consolidated positions before monthly U.S. jobs data and as broader trade tensions dominated sentiment.

The British currency has had a volatile week as headlines on the progress of Brexit negotiations forced traders to unwind positions in a currency market that is broadly short on the pound based on positioning data.

A Reuters poll showed that sterling could rise as much as 6 percent in a year, but a no-deal Brexit could see it falling as much as 8 percent from current levels.

German Chancellor Angela Merkel’s government is preparing for all Brexit scenarios, including a no-deal while Irish Prime Minister Leo Varadkar said on Thursday Dublin had not received any indication of “dramatic moves” by either side towards progress in the Brexit talks. and

Against the dollar, the British currency edged 0.1 percent higher at $1.2940 but was on track for its biggest weekly drop since Aug. 16, according to Thomson Reuters data.

Against the euro, the pound weakened by 0.1 percent at 90.03 pence.

At heart of the negotiations are the twin sticking issues of what UK’s trade ties with Europe would look like after Britain leaves the EU on March 29. 2019 and the so-called Irish ‘backstop’ where both Britain and the EU fear strict controls could undermine a peace deal.

The British currency remains one of the most shorted among major currencies, along with the yen, and any slightly positive headline on the progress of the Brexit negotiations tends to elicit a big market reaction.

On Friday, trade concerns were front and center for currency investors after a public comment period for proposed U.S. tariffs on an additional $200 billion worth of Chinese imports ended at 0400 GMT, raising concerns that a fresh salvo will be fired in the ongoing Sino-U.S. trade war. (Reporting by Saikat Chatterjee Editing by Matthew Mpoke Bigg)

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