Sterling retreats after report on UK refusal of EU Irish border offer

LONDON (Reuters) - Sterling erased earlier gains on Wednesday after The Times reported that Britain’s Prime Minister Theresa May had rejected an improved offer from the European Union to solve the Irish border issue.

FILE PHOTO: Bank of England governor Mark Carney poses with a new polymer five pound note at Whitecross Street Market in London, Britain September 13, 2016. REUTERS/Stefan Wermuth

The British currency sank to the day’s low after the report said May will appeal to EU leaders at a summit in Austria to move away from the bloc’s chief Brexit negotiator Michel Barnier’s position.

May is meeting with EU leaders at a summit in Salzburg, Austria.

May received less than glowing praise for her Brexit plan on Wednesday, with top EU official Donald Tusk saying Britain must rework its proposals for Northern Ireland and trade.

“This summit could be a turning point for Brexit. If sentiment sours making a “no deal” scenario more likely, then we could see the pound tumble,” said City Index analyst Kathleen Brooks.

Sterling slid more than half a cent against the dollar after The Times’ report to a low of $1.3098 before edging slightly higher to trade at $1.3152 at 1520 GMT.

The pound had earlier risen to a nine-week high of $1.3215 as data showed inflation unexpectedly accelerated in August.

Consumer price inflation rose at an annual rate of 2.7 percent in August, compared with 2.5 percent in July.

The figures saw traders bring forward their expectations of the next Bank of England interest rate hike to August 2019 rather than November next year.

The European Union’s chief Brexit negotiator Barnier said on Tuesday the bloc was ready to improve its proposal for an “insurance policy” backstop arrangement on how to manage its Irish border that would avoid creating a physical customs border on the Irish Sea.

Brussels and London have made positive noises in recent days on major obstacles, including how to keep an open border between the British province of Northern Ireland and EU-member Ireland, though investors have shied away from taking big bets.

That has helped sterling rally more than 4 percent from 2018 lows hit in August when fears that Britain would crash out of the EU without a trade deal spooked investors.

Reporting by Tom Finn and Saikat Chatterjee; Editing by Janet Lawrence and Ken Ferris