Sterling bounces but holds near eight-day lows

Sterling rebounded off the day's lows but remained well near an eight-day low on Thursday as investors doubted whether British officials will be able to break through a deadlock before a crucial EU summit next week. "Sterling is a binary risk at the moment depending on the outcome of the Brexit negotiations though we have seen some positive headlines today which has helped to calm sentiment on the currency," said Viraj Patel, an FX analyst at ING in London.
The pound edged a quarter of a percent higher to $1.3427 but not far from a November 29 low of $1.3358 hit the previous session. Britain wants to agree with the EU on December 14 to move the Brexit talks to the next phase focusing on trade and a two-year transition deal to smooth its departure in March 2019.
But the timetable has been thrown into doubt after discussions broke down in Brussels on Monday over the future situation on Northern Ireland's border with Ireland. Talks between Democratic Unionist Party and the British government to secure a deal on the post-Brexit future of the region's border continued on Thursday, a spokesman for the Northern Ireland party said on Thursday.
Though sterling has weakened 1.4 percent since hitting a two-month high of $1.355 last Friday, investors have generally sat on their hands due to the uncertainty over the Brexit negotiations. Against the euro, sterling strengthened by a similar margin to 87.81 pence on Thursday.
The Northern Irish party that props up May's minority Conservative government rejected a proposal this week on the post-Brexit border with Ireland that could have helped move forward negotiations on Britain's exit from the European Union. High-frequency indicators of market positioning and options market hedging have also shifted markedly in recent weeks to show some optimism emerging on sterling.
But money managers have warned against buying the currency across the board until more clarity emerged. Some disappointment on the Brexit negotiations progress is also becoming apparent in the foreign exchange derivatives markets, with one-month risk reversals, an indicator of how much sterling calls are purchased relative to puts, slipping back after hitting a two-month high earlier this week. One-month risk reversals on sterling have slipped back to minus 0.625 after hitting a two-month high of minus 0.177 on Monday.