LONDON (Reuters) - Sterling fell on Friday as investors began to doubt recent optimism about an imminent Brexit deal and the U.S. dollar held on to recent gains.
The pound has traded as high as $1.3176 this week, a three-week high, after Britain appeared to be edging towards clinching an exit deal with the European Union.
But work remains to be done before an agreement is reached, with both sides struggling to decide on a mechanism for avoiding a hard border separating Northern Ireland, a British province, and EU member state Ireland.
The Northern Irish party that props up Prime Minister Theresa May’s government said on Friday that her negotiations had raised alarm bells and that it would not support a Brexit deal that divided the United Kingdom.
Sterling dropped as much as half a percent to as low as $1.2986, back to levels it stood at on Monday. Much of the fall came after investors flooded into dollars following a relatively hawkish U.S. Federal Reserve’s policy meeting on Thursday.
The pound later recovered some of those losses as the dollar stuttered, and by 1535 GMT was trading 0.1 percent lower at $1.3046.
Sterling was unchanged versus the euro at 86.97 pence per euro, but that was within a whisker of a 6-1/2 month high of 86.91 pence.
Third-quarter GDP numbers showed a 0.6 percent rise from the previous three months, in line with a Reuters poll of analysts, figures from Britain’s Office for National Statistics (ONS) showed.
The data suggested Britain’s economy has kept up healthy momentum, but this may prove a high watermark ahead of Brexit. The numbers failed to elicit much of an immediate response in the pound, British government bond markets or the UK stock market.
Economist George Buckley noted that business investment, which contracted a worse-than-expected 1.2 percent in the third-quarter, was the negative surprise.
“It seems that Brexit uncertainty is exerting a larger negative influence on business investment as we move closer to a deal/no-deal being confirmed,” the Nomura economist said.
ING analysts said a “Brexit overhang” would limit any further repricing of future British rate rises that would otherwise buoy the currency. The analysts said a rate rise before May 2019 looked “very unlikely”.
Money markets are currently only fully pricing in a 25 basis-point hike from the Bank of England by December 2019.
Reporting by Tommy Wilkes; Editing by Hugh Lawson and Mark Heinrich