December 6, 2017 / 10:13 AM / 10 days ago

Sterling falls to one-week lows on Brexit deadlock fears

LONDON (Reuters) - Sterling touched a one-week low in volatile trading on Wednesday amid growing concerns that a Brexit deal may be unlikely before next week’s key EU summit.

Brexit negotiations can move to phase two next week only on the basis of a tentative Irish border agreement that collapsed on Monday, otherwise talks to break the impasse will resume in the new year, Irish Prime Minister Leo Varadkar said on Wednesday.

The Northern Irish party that props up May’s minority Conservative government rejected a proposal this week on the post-Brexit border with Ireland that could have helped move forward negations on Britain’s exit from the European Union.

Market bets on sterling had shifted considerably in recent weeks towards betting on a breakthrough in Brexit negotiations, with sterling rising to more than a two-month high last Friday.

Though the tentative deal was rejected on Monday, some market strategists such as Nomura believe there is a 70 percent probability of a breakthrough in talks, though some traders say the latest headlines reduce those expectations even further.

“This political ping-pong battle is really hurting investor sentiment towards sterling,” said Neil Jones, Mizuho’s head of currency sales for hedge funds in London.

Failure could mean a delay until February, adding to the risk of businesses scaling back investment plans in Britain as uncertainty clouds the outlook beyond Brexit in March 2019.

The British pound fell 0.6 percent to an intraday low of $1.3358 on the day. It trimmed some losses in late London trading to stand 0.5 percent down at $1.3383.

Against the euro, sterling was down 0.2 percent on the day at 88.11 pence.

High-frequency indicators of market positioning and options market hedging have also shifted markedly in recent weeks to show some optimism emerging on sterling, with the British currency hitting a two-month high last week.

But reflecting the growing pessimism about a conclusive breakthrough in talks before a crucial EU summit next week, some traders reported a pickup in selling short-dated calls on sterling around the 2017 highs of $1.3653, hit in mid-September.

Selling calls ensure a steady premium income for trading desks but also reflect a growing view that it is unlikely to rise to those levels.

“The Brexit clock is ticking and the positions of the UK and the EU negotiations remain far apart and the risk of a ”very hard“ Brexit has risen,” said Didier Borowski, head of macroeconomic research at Amundi.

Against a trade-weighted basket, sterling held at 78.2, down more than 1 percent over the last two days.

Reporting by Saikat Chatterjee, editing by Larry King

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