LONDON (Reuters) - Sterling weakened on Friday as investors booked profits after a rally that has left the British currency poised for a second consecutive week of gains on growing optimism about an agreement on a Brexit deal at a European Union Summit next week.
Underscoring the British pound’s gains have been favorable comments this week from EU Brexit negotiator Michel Barnier that a deal with Britain could be “within reach” next 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.
ING strategists advised caution on adding long bets on the British currency around current levels, because domestic politics might prove to be a major headwind.
Britain’s Brexit minister Dominic Raab said on Friday that there remained significant sticking points that need to be resolved before a deal on the terms of the UK’s departure from the EU can be agreed.
The British currency slid to as low as $1.3171, down half a percent on the day. Against the euro, sterling was broadly steady at 87.575 pence.
While long positions in sterling have increased in the last two weeks, overall bets remain near their lowest since May 2017, according to the latest positioning data.
Brexit negotiations have changed pace and have become more positive over the past week, though there are still some big differences to resolve, British finance minister Philip Hammond said.
“We still rather think the road to an agreement is highly uncertain as plans appear to revolve around the UK remaining in an effective customs union with the EU indefinitely after 2020,” Scotiabank analysts said in a note.
“That hardly equates to even the basic notion of “Brexit” and if it is PM May’s intention to push ahead with this idea, it may struggle to get through parliament.”
Crucially, Britain and the EU need to agree on an Irish backstop designed to prevent a hard border between Northern Ireland and EU-member the Republic of Ireland. Politicians are at odds over how to design and then implement any backstop, and to ensure it is not permanent.
Reporting by Saikat Chatterjee