Sterling above USD 1.3 but market nerves obvious ahead for key Brexit meet

Sterling held above $1.3 on Monday but traded in a narrow range reflecting nervousness in the market about key Brexit talks in London between Prime Minister Theresa May and the opposition Labour Party.

Britain is due to leave the European Union on Friday but May is seeking a compromise with Labour leader Jeremy Corbyn on the terms of the UK's divorce ahead of an EU leaders' summit on Wednesday. A compromise would support her request to delay Brexit until the end of June and the BBC reported that May could offer to remain in a permanent customs union with the bloc to win the support of Labour.

With so much uncertainty -- possible scenarios include a deal-based exit, no deal and no Brexit at all -- the pound has been stuck this month between $1.3-1.32. But analysts say it could break out of that range this week. "The granting of an extension may support the pound due to the avoidance of an imminent no-deal exit, however, the deadlock in Westminster over the way forward is likely to cap any rallies unless cross-party talks are more fruitful this week," said Michael Brown, a senior analyst at Caxton FX.

The pound traded up 0.1 per cent at $1.3046 and was down 0.3 per cent against a stronger euro at 86.34 pence. May heads to Berlin and Paris on Tuesday to meet Chancellor Angela Merkel and President Emmanuel Macron and will be phoning other leaders before setting out the case for another delay at Wednesday's EU summit in Brussels.

The impact of a long Brexit delay on sterling is unclear. The pound would gain if a delay led eurosceptic lawmakers to back the deal May negotiated with the EU or brought about a reversal of the 2016 Brexit referendum. Investors concerns about big swings in the pound have subsided somewhat according to one-month implied volatility gauges which are at their lowest levels in four-weeks.