Sterling tumbled more than half a percent on Tuesday due to broad dollar demand at the end of month and a return of concerns over Brexit. The British pound fell 0.6 percent to $1.3240 in late trading, on track for its third-biggest daily decline this month amid concerns over a possible standoff at an EU summit next month.
"Investors were previously quite upbeat on the prospects of the divorce bill being agreed and were looking to push the pound higher but the Ireland border issue has put a stop to that," said Neil Jones, Mizuho Bank Ltd's head of hedge fund sales in London. Against the euro, its losses were a bit more muted with sterling trading 0.4 percent weaker at 89.68 pence
Hopes had been rising for a breakthrough in Brexit talks next month. But differences have re-emerged over the Northern Irish-Irish border, amid tensions exacerbated by a political crisis in Ireland. "The EU has given the UK government a deadline of next Monday to come up with a plan on the Irish border, so that seems to be the main sticking point now," said Societe Generale FX strategist Alvin Tan.
Any worsening of the standoff between London, Dublin and Brussels over the already complex and politically sensitive border issue could spell trouble for the pound. "In that situation, I wouldn't be surprised if we see cable (sterling vs dollar testing the August low of $1.30 again and euro/sterling re-testing of the 93 level again," Tan added, although he also said it could be a buying opportunity.
The dollar's gains across the board in New York trading also intensified downward pressure on sterling.
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