December 7, 2017 / 10:30 AM / a year ago

Sterling pauses near 8-day lows as Brexit talks eyed

* Graphic: sterling and gilt yields

* Graphic: World FX rates in 2017

* Graphic: Trade-weighted sterling since Brexit vote

By Saikat Chatterjee

LONDON, Dec 7 (Reuters) - Sterling held steady near an eight-day low on Thursday as investors paused to monitor developments in Britain’s tense negotiations over leaving the European Union.

“Brexit news is going to drive sentiment, and though the headline risks are negative, investors are staying on the sidelines,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Britain wants to agree with the EU on Dec. 14 to move the Brexit talks to the next phase focusing on trade and a two-year transition deal to smooth its departure in March 2019.

But the timetable has been thrown into doubt after discussions broke down in Brussels on Monday over the future situation on Northern Ireland’s border with Ireland.

The pound edged 0.1 percent lower to $1.3364 in early trades, just shy of a Nov. 29 low of $1.3358 hit the previous session.

Though sterling has weakened 1.4 percent since hitting a two-month high of $1.355 last Friday, investors have generally sat on their hands due to the uncertainty over the Brexit negotiations.

Against the euro, sterling was flat at 88.10 pence.

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 negotiations on Britain’s exit from the European Union.

High-frequency indicators of market positioning and options market hedging have also shifted markedly in recent weeks to show some optimism emerging on sterling. But money managers have warned against buying the currency across the board until more clarity emerged.

Some disappointment on the Brexit negotiations progress is also becoming apparent in the foreign exchange derivatives markets, with one-month risk reversals, an indicator of how much sterling calls are purchased relative to puts, slipping back after hitting a two-month high earlier this week.

One-month risk reversals on sterling have slipped back to minus 0.625 after hitting a two-month high of minus 0.177 on Monday. (Reporting by Saikat Chatterjee; Editing by Hugh Lawson)

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