No deal - sterling slips on lack of Brexit agreement

LONDON (Reuters) - Sterling slipped from a six-month high against a trade-weighted basket of currencies on Monday after European Commission President Jean-Claude Juncker and British Prime Minister Theresa May failed to reach an agreement on a divorce deal.

Juncker told reporters that despite significant progress during May’s visit to Brussels, two or three open issues remained and “it was not possible to reach a complete agreement”.

Sterling fell around a cent on the news, hitting the day’s lows of $1.3415 but it recovered to trade at $1.3473 by 1635 GMT, almost flat on the day.

“Sterling has dipped more than fallen off a cliff,” said Societe Generale macro strategist Kit Juckes. “I still think we react more to good news than to bad news.”

“No deal today doesn’t necessarily mean the end of the world if we’ve got a couple more days left .... We’re not completely out of time, we’re getting closer and there’s a fair amount of good will for moving on to the next stage of negotiations,” he added.

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Sterling trimmed earlier gains against the euro to trade at 87.96 pence, still up around 0.4 percent on the day.

Against the Bank of England’s trade-weighted basket, though, sterling slipped to 78.8 from an earlier peak of 79.0 - its highest since mid-May.

Both sides of the talks in Brussels said they should unlock talks on future trade relations in the coming days.

Junker and May spoke after government sources in Dublin said Britain had agreed to keep Northern Ireland “aligned” to EU regulations to avoid a “hard border” with the Irish Republic - news that had sent the pound higher on hopes of rapid trade talks.

But that development also provoked an angry response from May’s coalition allies in Northern Ireland, the Democratic Unionist Party (DUP), demanding equal treatment with the rest of the United Kingdom.

“Brexit remains a huge mess, and just when there was a hint of progress, yet again a spanner is thrown in the works,” said AxiTrader analyst James Hughes.

“This time the spanner comes in the form of the DUP and Northern Ireland, as Theresa May’s disastrous election campaign comes back to bite her.”

Earlier, European Parliament member Elmar Brok said he was “astonished” at how far the negotiations had come and that differences remained over “just a few words”, which had pushed the pound higher.

A Reuters poll last week found economists believe the chance of a “disorderly Brexit” - where no deal has been reached when the two years of talks are scheduled to close in March 2019 - has declined over the past month.

Speculators bought back into the pound in the week up to last Tuesday, data showed on Friday, with positioning moving into positive territory - reflecting more bets that sterling will strengthen than that it will fall - for the first time since October. [IMM/FX]

Reporting by Jemima Kelly; Editing by Matthew Mpoke Bigg