Sterling fell on Friday, reversing some of its recent gains, after European Union chief negotiator Michel Barnier warned that there were just hours left to reach a Brexit trade deal with London.
The British currency is still on track for its best week since the end of July as market confidence has risen sharply this week on hopes that the European Union and Britain will clinch a last-minute trade deal ahead of a Dec. 31 deadline, when a Brexit transition period ends.
Almost a year after Britain formally left the EU, the two sides are in the final stretch of talks over a post-Brexit trade deal.
The pound hit 2-1/2 year highs above $1.36 this week, but Friday’s trading session served as a reminder that the two sides still have divergent ideas on how they want to build their future relationship.
Barnier told the European parliament that the path to an agreement was “very narrow”, while British Prime Minister Boris Johnson said the British door was open but that the EU should see sense and compromise.
“The latest comments are creating a little bit of doubt in markets, but most still see a deal as highly likely,” said Adrian Schmidt, head of FX strategy at Continuum Economics.
Schmidt added that the latest comments from Johnson looked like “an attempt to wring concessions out of the other side at the last minute”.
Sterling weakened to as low as $1.3489 and was at $1.3505 by 1334 GMT, down 0.6% on the day.
Against the euro, sterling was down 0.4% at 90.71 pence.
“The pound corrected from its 2-year highs in early trading today but remains at levels that clearly signal a lingering optimism on a deal and GBP downside risk remains asymmetrically higher in case of no-deal,” ING analysts wrote in a note to clients, adding that a deal could still be agreed over the weekend.
U.S. investment bank JPMorgan said the probability of a trade deal had risen to 70% from 60%.
Meantime, Bank of England policymaker Gertjan Vlieghe said the central bank may need to cut interest rates below zero for the economy to fully recover, according to Bloomberg TV.
Reporting by Joice Alves; Additional reporting by Tommy Wilkes; Editing by Elaine Hardcastle and Kirsten Donovan