Traders turn cautious on sterling ahead of May-Juncker meeting

LONDON (Reuters) - Sterling slipped from a two-month high against the dollar on Friday, with some investors concerned that optimism around Britain getting a deal with the EU - which this week lifted the pound to six-month highs - might have gone a little too far.

British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

The pound had jumped on Thursday on reports that Britain and the European Union had reached agreement on a divorce bill and were close to a deal on the border between the Irish Republic and Northern Ireland, which is part of the UK.

But although Ireland said on Friday a breakthrough on the future of the Irish border after Brexit remained “doable” before a key EU summit in two weeks’ time, the negotiating teams are “not there yet”, the Irish foreign minister said.

Traders are eyeing a meeting between May, EU chief executive Jean-Claude Juncker and his chief Brexit negotiator Michel Barnier on Monday, which will mark the “absolute deadline” for London to deliver “sufficient progress” in its divorce offer as set by European Council President Donald Tusk.

After reaching as high as $1.3550 in early trading in Asia, its strongest since Sept. 25, sterling slipped to $1.3500 by 1715 GMT, down 0.2 percent on the day, though still up more than 1 percent on the week.

“Over the last week we’ve seen the market become quite optimistic about Britain reaching a deal with the EU, so from that perspective there’s some room for disapppointment and so the market is a little bit cautious going into the weekend,” said MUFG currency economist Lee Hardman.

The pound drew some support in late trade in London from an ABC News report that ex-U.S. national security adviser Michael Flynn is prepared to testify that President Donald Trump directed him to make contact with Russians when he was a presidential candidate. This knocked down the dollar across the board. Reuters could not immediately verify the ABC report, which cited a Flynn confidant.

Against the euro, sterling slipped 0.2 percent to 88.17 pence.

Sterling got a brief boost earlier in the day after data showed British factories enjoyed their best month in more than four years in November, suggesting manufacturing would give a boost to the sluggish economy going into 2018.

The monthly survey of purchasing managers in the manufacturing sector (PMI) jumped to 58.2 from an upwardly revised 56.6 in October, topping all forecasts in a Reuters poll of economists.

“The overall impact on sterling (from the data) is very muted as investors are more focused on (Prime Minister) Theresa May’s upcoming meeting with EU’s Jean Claude Juncker,” Think Markets analyst Naeem Aslam said.

“The agenda for May is to make her decision on the control points in Northern Ireland.”

On a trade-weighted basis, sterling was trading near its highest levels in six months after a climb of around 1.5 percent this week - its best performance since mid-September.

Reporting by Jemima Kelly; Editing by Gareth Jones