October 4, 2019 / 9:31 AM / 18 days ago

Sterling rebound fizzles on declining Brexit deal hopes

LONDON (Reuters) - The pound fell on Friday and was struggling to mark its first weekly gain in three weeks, as concerns over whether Britain can agree a Brexit deal with the European Union at a summit later this month rattled investors.

FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

Against the dollar GBP=D3, the pound slipped 0.3% to $1.2294 and was down 0.5% against the euro EURGBP=D3 at 89.35 pence.

At 1515 GMT, the currency was just into positive territory for the week.

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”.

For an explainer here on the latest proposal, see

“Hopes for a last-minute deal have diminished,” said Lee Hardman, an analyst at MUFG. “That largely rules out the possibility of the pound strengthening from here.”

Hardman, however, said that investors’ view that Johnson would be forced to seek an postponement to the departure date if he could not agree a deal have put a floor under the pound because few fear an immediate no-deal exit from the EU.

Still, expected price swings for the British pound or implied volatility gauges GBP1MO= stayed elevated with one-month maturities trading above 11 vol, nearly double the levels from early September, indicating growing unease from 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.

For a graphic on GBP weekly performance:

here

Reporting by Saikat Chatterjee; Editing by Toby Chopra and Frances Kerry

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