LONDON (Reuters) - Sterling held near a one-week low on Monday as Brexit negotiations faltered before a crucial European Union summit later this week.
Less than six months before Britain leaves the bloc negotiators from both sides are trying to overcome the biggest 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.
Prime Minister Theresa May said she believed a deal was achievable and urged the EU on Monday not to allow a stand-off over the so-called Irish backstop to derail the talks.
But no agreement is in sight.
EU negotiator Michel Barnier said a gap still needed to be bridged between his “backstop” demands that Northern Ireland stay in the EU’s economic zone and London’s rejection of any checks on trade between the province and the British mainland.
There is a risk that border checks with EU member Ireland could revive conflict.
The pound fell to $1.3080 on Monday, its lowest in almost a week, and at 1530 GMT traded down 0.1 percent. Against the euro it weakened by a similar margin to 88.25 pence.
“Despite the weekend news, markets appear 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 paused Brexit negotiations until leaders of member states meet in Brussels. It is not clear what leaders will be able to agree on at a dinner on Wednesday before Prime Minister May joins them at a regular summit on Thursday.
Even if the Irish border issue is resolved, investors fear it could signal the start of another, potentially tougher battle for May with her own lawmakers who want a cleaner break from Europe.
That is reflected in latest positioning data which shows that traders 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 Tom Finn and Saikat Chatterjee; Editing by Louise Heavens and David Stamp
Our Standards: The Thomson Reuters Trust Principles.