October 22, 2018 / 8:33 AM / a month ago

Sterling modestly firmer vs dollar but Brexit concerns cap gains

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

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

LONDON, Oct 22 (Reuters) - Sterling firmed modestly versus the dollar on Monday, benefiting from the greenback’s retreat and signs a Brexit deal was almost done, though the prickly Irish border issue and disagreements within the UK ruling party capped gains.

British Prime Minister Theresa May is expected to tell parliament later that 95 percent of the country’s divorce deal has been settled. But she will maintain opposition to the European Union’s proposal for the land border with Northern Ireland.

That issue scuppered efforts to reach a Brexit deal at last week’s summit, and a proposal to extend a status-quo transition period beyond the current proposed date of December 2021 has angered the eurosceptics in her party.

“There’s a lot of discussion in the market over the possibility of a no-confidence motion against May, which has increased over the weekend,” Investec economist Victoria Clarke said.

“This issue is hanging over sterling, which is (also) waiting for another steer on Brexit, likely from this address from May today.”

By 0815 GMT, sterling was 0.1 percent firmer at $1.3081, rising off two-week lows touched on Friday

But against the euro, the pound was flat to slightly weaker to 88.12 pence, as the single currency was supported by Moody’s decision to hold off cutting Italy’s credit rating outlook to negative, a move that would have left the country at greater risk of tipping into the “junk” category

Brexit optimism, alongside a paring of dollar long positions, partly drove a fall in short sterling bets to a net 50,353 contracts in the latest week, versus more than 60,000 the week before, calculations by Reuters and the Commodity Futures Trading Commission showed.

But speculators also pulled back bullish bets on the dollar which retreated against a currency basket to a five-day low .

“Sterling remains well supported by short-covering, with sterling bears liquidating their positions in seven of the past eight weeks,” Scotiabank told clients. (Reporting by Sujata Rao Editing by Raissa Kasolowsky)

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