Sterling rally fades as PM May pursues last-ditch Brexit deal

LONDON: The pound retreated from a one-week high on Wednesday as British Prime Minister Theresa May returned to Brussels to try to salvage her Brexit deal.

If May cannot persuade European Commission chief Jean-Claude Juncker or the British parliament to modify her deal, Britain could crash out of the world's biggest trading block in 37 days.

The main hurdle is the so-called backstop, an insurance policy to prevent the return of extensive checks on the border between European Union member Ireland and the British province of Northern Ireland. Uncertainty over those arrangements is weighing on the pound.

Sterling surged above $1.3 on Tuesday in its biggest daily gain of the year against the dollar, partly on hopes of a breakthrough in the Brexit impasse.

But traders said those bets had been misplaced.

"I think they [the EU] could tinker with the language [of the deal] a bit, but whether it would be enough to convince 51 percent of MPs in parliament to vote for it is dubious," said ACLS Global chief strategist Marshall Gittler.

"I'd go short on the pound," he added.

Sterling fell 0.3 percent against the dollar to $1.3026. Against the euro, the British currency also weakened 0.3 percent to 87.12 pence per euro.

Parliamentary backing for a Brexit deal could be secured if a "simple and important" change can be made to the Irish backstop, said UK Foreign Secretary Jeremy Hunt on Wednesday.

Recent wild swings in the pound have underlined the currency's volatile nature ahead of Brexit.

Investors are skittish because May has yet to win parliamentary support for her deal six weeks before Britain is due to leave and options markets show jitters remain about the March 29 deadline.

Derivative markets were cautious, with two-month pound risk reversals, a gauge of calls to puts on the British currency, hovering near three-month lows.

That is a sign of investor caution about the pound's outlook in the near-term.

Pressure on May to end the uncertainty for business has increased after Honda's decision this week to close its British car manufacturing plant.