June 7, 2018 / 2:57 PM / 12 days ago

Sterling reverses gains, falls 0.25 pct on Brexit worries

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Saikat Chatterjee

LONDON, June 7 (Reuters) - Sterling reversed earlier gains and fell a quarter of a percent on Thursday as concerns about Brexit negotiations prompted investors to lock in gains after a recent rebound.

The British currency had hit a two-week high in early trading, helped by general dollar weakness on the back of a broadening rally in the euro currency with some recent improvement in data also helping sentiment.

But headlines about Prime Minister Theresa May’s struggles to get her own cabinet to agree on a plan to prevent a hard border on the island of Ireland if Brexit talks fail, pushed the pound lower.

“It is become clear that there is no coherent answer to the Irish question at the moment,” said Jonathan Davies, head of currency strategy at UBS Asset Management.

“Most investors, I think, are moving in the direction of thinking this will get resolved and we will get a nice orderly Brexit but clearly not everything has been resolved and it is not clear how it is going to be resolved,” he added.

Sterling rose to $1.3472 per dollar in early London trading , its highest levels since May. 22 as the dollar’s run higher in recent weeks peaked.

But it gave up those gains and fell as much as 0.3 percent on the day to $1.3371.

Against the euro, sterling weakened to a one-month low at 87.77 pence.

Despite sterling’s weakness, markets were broadly neutral on sterling’s outlook with positions broadly light.

The dollar’s rally in recent weeks has squeezed out long sterling positions with net long bets on the British pound falling to a quarter from a four-year high in April.

But after falling to around $1.32 at end-May, sterling has rebounded somewhat thanks to a pick-up in data.

Data this week, including a widely watched survey of the dominant services sector on Tuesday, suggest weaker economic momentum in the first quarter was temporary and the economy was recovering.

Investors said they would need to see more than one month of solid economic data before expecting the Bank of England to raise rates. Money markets are now pricing in a 60 percent chance of a 25 basis point rate rise in September.

A trade-weighted index for the British currency has tiptoed higher to 78.69 after hitting a near-three month low in end May.

“I don’t think the market is focused on the underlying Brexit issues at the moment but going along with the general dollar trend,” said Neil Mellor, a senior currency strategist at BNY Mellon in London. (Reporting by Saikat Chatterjee; Additional reporting by Sujata Rao Editing by Matthew Mpoke Bigg and Andrew Heavens)

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