October 4, 2019 / 9:27 AM / 15 days ago

Sterling set for first weekly rise in 3 weeks

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

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

LONDON, Oct 4 (Reuters) - The pound rose on Friday and was poised for its first weekly gain in three weeks as investors cut some short bets on the British currency, although concerns a Brexit deal with the European Union at a summit later this month is unlikely capped gains.

Against the dollar, the pound was broadly steady at $1.2334 and was a shade weaker against the euro at 88.96 pence. Versus the dollar, it was down 0.7% from a one-week high above $1.24 hit in the previous session.

The British government on Wednesday proposed an all-island regulatory zone in Ireland to cover all goods, replacing the so-called backstop arrangement, and was waiting for an official response from its European counterparts.

But a European Parliament Brexit group believes the new proposals “do not represent a basis for an agreement”, according to the draft of a statement seen by Reuters ahead of release later in the day. A senior European Union official said on Thursday that Johnson’s last-ditch Brexit proposal “can’t fly”.

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“The current proposal continues to go up against key red lines of the EU, as does PM Johnson’s time-limited backstop Plan B, and so we think a deal before the 19th of October as unlikely,” MUFG strategists said in a note.

Expected price swings for the British pound or implied volatility gauges stayed elevated with one-month maturities trading above 11 vol, nearly double of levels from early September, indicating growing unease form investors about the pound’s short-term outlook.

Just 28 days before the United Kingdom is due to leave the EU, both sides are positioning themselves for a delay or a disorderly no-deal Brexit. Johnson says he wants a deal but insists there can be no delay beyond the end of the month.

Reporting by Saikat Chatterjee; Editing by Toby Chopra

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