Sterling slips as dollar weakness fades; Brexit talks weigh

Sterling retreated from a four-month high on Tuesday as a broad U.S. dollar rout over the past week ran out of steam and negative news from Brexit negotiations prompted hedge funds to take profits. "They were probably hoping to get something a bit more tangible on the EU-UK trade negotiations." That uncertainty was reflected in the currency derivative markets.

Sterling retreated from a four-month high on Tuesday as a broad U.S. dollar rout over the past week ran out of steam and negative news from Brexit negotiations prompted hedge funds to take profits. The pound slipped 0.02% lower versus the dollar at $1.2878 after rising to its highest level since March at $1.2977 in early Asian trading. It was little changed against the euro at 91.14 pence.

"We just have a bit of a pullback," said Gavin Friend at National Bank of Australia. "Sterling has been a reluctant riser against the weaker dollar and I think until we get some sort of clarity on the EU-UK trade situation, sterling is going to remain like that." Concerns about the lack of progress of Brexit negotiations also prevented the pound from pushing above the $1.30 levels.

The European Union says a deal needs to be done by October to allow time for ratification by the end of the year. Both sides have said the talks may be stalling. Michel Barnier, the EU's chief Brexit negotiator, said a trade deal with the UK was possible, sources told Reuters on Monday. "Looking at the various comments from Barnier, markets are pricing in more uncertainty," said Pesole. "They were probably hoping to get something a bit more tangible on the EU-UK trade negotiations."

That uncertainty was reflected in the currency derivative markets. Sterling/dollar implied volatility, a gauge of expected swings embedded in currency options, rose to a one-month high around 8.3%, boosted by the dollar's plunge this week.