October 15, 2018 / 8:39 AM / a month ago

Sterling pinned near 1-week lows as Brexit talks stall

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

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

LONDON, Oct 15 (Reuters) - Sterling held near a one-week low on Monday as Brexit negotiations appeared to have hit an impasse before a crucial European Union summit later this week.

Negotiators from both sides have been locked in talks this week to overcome differences on the biggest outstanding hurdle to a deal - how to keep the UK frontier with the Irish republic free of border checks after Britain leaves the EU in March.

But EU negotiator Michel Barnier said after meeting British Brexit Secretary Dominic Raab that they could still not bridge a gap between his “backstop” demands that Northern Ireland stay in the EU’s economic zone if there is a risk that border checks with EU member Ireland could revive conflict, and London’s rejection of any checks on trade between the province and the British mainland.

The British currency edged 0.3 percent lower to $1.3080 on Monday, its lowest in almost a week. Against the euro it weakened by a similar margin to 88.09 pence.

“Despite the weekend news, markets appear fairly more comfortable that some sort of agreement will be reached at the EU summit later this week and we should see sterling supported at these levels,” said Lee Hardman, a currency strategist at MUFG in London.

Britain and the EU have called a pause in the Brexit negotiations until leaders of member states meet in Brussels and it is not clear what those leaders can agree to at a dinner of 27 on Wednesay before British Prime Minister Theresa May joins them at a regular summit on Thursday.

Latest positioning data showed that investors have become more cautious about sterling after a recent unwinding of short positions.

Hedge funds resumed shorting the British currency, raising net short bets to their highest level since May 2017 after cutting short bets in the two weeks before that, according to futures data. (Reporting by Saikat Chatterjee; Editing by Louise Heavens)

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