UPDATE 3-Sterling cedes gains after Irish backstop hopes dashed

Sterling went on a roller coaster ride on Wednesday, jumping on reports of a breakthrough on the Irish backstop and then giving up its gains as hopes of progress on a key sticking point for a Brexit deal were dashed. The pound spiked more than 0.5% against the U.S. dollar after The Times newspaper said Brussels was prepared to offer a mechanism for the Northern Irish assembly to leave a new backstop after a number of years.

But it fell back when the chief whip of Northern Ireland's Democratic Unionist Party said it would oppose any such mechanism and slipped further from the day's highs when EU officials denied any such concession had been made. The British currency was last trading a fraction lower on the day at 1.2210, after spiking to as much as $1.2292. It also touched a high of 89.38 pence against the euro but was last down 0.1% at 89.79 pence.

Proposals for what happens on the Irish border after Brexit are the main sticking point preventing London and Brussels from agreeing with a withdrawal deal. "Sterling had fared better and rebounded this morning but is now falling back again," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

"This shows that there is a recognition that there isn't a substantive breakthrough in the Brexit talks," he said. A senior diplomat dismissed the Times report as "spin" in the negotiations, while another official said that "no bold new offer is coming from the EU side at this stage".

'WORSENING RELATIONSHIP'

Justin Onuekwusi, a fund manager at Legal & General Investment Management, said: "It's very unlikely we get a hard Brexit on Oct. 31 but the worsening relationship between the EU and UK means the risk of this goes up a little bit."

Sterling had been on the back foot in early London trading on media reports that British Prime Minister Boris Johnson faced a cabinet rebellion if he led Britain to a no-deal Brexit. Johnson promised lawmakers that the next Conservative Party manifesto would contain a promise to avoid a no-deal exit, lawmaker Damian Green said later on Wednesday.

The Guardian also reported that the EU may offer to extend the Brexit deadline until June 2020. Jane Foley, a senior foreign-exchange strategist at Rabobank, said the Guardian article showed, "the odds increasing of a delay until summer next year".

Weekly futures data showed that positions betting against the pound declined in the past week. But there were still more negative bets than positive ones, leaving the market vulnerable to a squeeze higher in the event of any favourable news.

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