LONDON: The pound was weaker on Tuesday as investors waited for EU leaders' response to a demand from Britain's prime minister to remove the Irish backstop from the Brexit deal.
Boris Johnson fired the opening salvo in his bid to renegotiate Britain's divorce from the European Union, saying the backstop - an insurance policy to avoid the return of a hard border on the island of Ireland - should be replaced with a pledge.
Sterling slipped 0.3% against both the dollar and the euro, to $1.2094 and 91.59 pence.
"More Brexit noise is likely as Europe 'responds' to PM Johnson's demands," said Kit Juckes, macro strategist at Societe Generale.
Sterling/yen "looks more likely to fall to 125 than rise to 130," Juckes added. The pound was last trading 0.5% lower versus the yen at 128.51.
The falls came after signs in recent weeks that investors were becoming less pessimistic on the pound. Hedge funds cut their net short sterling positions to $7.22 billion in the week to Aug. 13, down from the previous week's $7.81 billion, which was the highest since April 2017, according to the Commodity Futures Trading Commission.
Three-month risk reversals in sterling, a contract which encapsulates the Brexit deadline, paint a similar picture. Demand for sterling "puts" - the right to sell pounds at a pre-agreed price - remains high. But that has eased in the past week, implying investors are less sure sterling will drop.
ING analysts said, however, that any possible spikes in sterling "should continue to be shortlived" given that "negative headline news (is) likely to return soon" as Johnson is due to meet both French President Emmanuel Macron and German Chancellor Angela Merkel during the week. He is also expected to meet Ireland's Prime Minister Leo Varadkar in September.
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