* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds comment and Reuters poll)
By Olga Cotaga
LONDON, June 4 (Reuters) - Sterling fell on Thursday as Britain and the European Union (EU) continued their Brexit negotiations, before the late June deadline by which the United Kingdom needs to say whether it wants an extension of the transition period.
The pound had gained after British officials said the United Kingdom might be able to reach a compromise on fisheries with the EU earlier this week. An improvement in risk sentiment had also helped the pound, pushing it up more than 3% in one week.
But a strengthening dollar and worries that Britain will exit the EU without a trade deal at the end of the year weighed on the British currency, which was last trading 0.5% down at just above $1.25. Against the euro, sterling slipped 0.1% to 89.50 pence.
“My sense is that the market is selling sterling again and this will continue this month on fear that we might not get a deal or an extension, so there are some preparations for a worst-case scenario — Brexit without a deal, which is a possibility,” said Neil Jones, head of European hedge fund sales at Mizuho.
A no-deal Brexit is not fully factored into the price of sterling at the moment, Jones said. “It doesn’t bode too well for sterling at the moment,” he added.
Prime Minister Boris Johnson’s spokesman urged companies on Wednesday to prepare for Britain’s exit from the EU single market and customs union at the end of the year regardless of the outcome of talks.
Some market participants, however, believe that the December transition deadline might get extended because of the new coronavirus pandemic, which slowed down Brexit negotiations, keeping the pound near the top of its recent trading range.
Societe Generale sees a 63% chance of an extension to the transition period, and an 83% chance of a deal.
Kit Juckes, macro strategist at Societe Generale, said: “On my longstanding estimate that ‘a deal’ puts EUR/GBP fair value at 0.85, and no deal puts it at 0.95, that suggests a fair price on these odds of 0.87”.
Sterling will lose recent gains against the dollar and weaken further if Britain does not ask for an extension to its Brexit transition period by a June 30 deadline to allow more time for talks on a trade deal with the EU, a Reuters poll found.
Reporting by Olga Cotaga, editing by Larry King and Emelia Sithole-Matarise