Sterling nurses losses as Brexit deal prospects elusive

LONDON: Sterling inched higher on Friday and held just above a near two-week low struck in the previous session as investors waited for a long weekend of headlines on the progress of Brexit negotiations between the European Union and British officials.

The British currency was a touch higher at $1.3081. It had hit its lowest level since Feb. 25 at $1.3067 in the previous session as disappointment that a revised Brexit deal is unlikely to materialise soon sapped demand.

With less than three weeks to go before Britain is due to leave the EU, officials are at an impasse over the so-called backstop aimed at ensuring a frictionless border between the British province of Northern Ireland and EU member Ireland.

Lawmakers will vote again next week on the withdrawal agreement British Prime Minister Theresa May negotiated with Brussels and which they overwhelmingly rejected in January. May will say on Friday that the EU should give ground before then in discussions over the backstop to help the deal, which includes a transition period to minimise economic disruption from Brexit, pass in parliament.

"With all alternatives still on the table, the most reasonable trading alternative seems to be to just minimise one's exposure to the pound and stay away for now," Richard Falkenhall, a senior FX strategist at SEB said.

Uncertainty over whether British lawmakers will support May's deal next week is showing up in the currency derivatives markets, with one-month implied volatility rising to its highest levels since mid-January.

One-week gauges of volatility are even higher, rising to 15 vol from to 9 vol earlier this week as investors prepare for a series of votes in Parliament next week.

Sterling would lose around 9 percent of its current value against the dollar and trade at $1.20 in the immediate aftermath of Britain leaving the EU without a deal, a Reuters poll of foreign exchange strategists predicted.

The EU has told Britain to rework its backstop proposal by Friday, but a British source said on Thursday that the Brexit impasse was unlikely to be broken before the weekend because the EU was not moving.