LONDON: Sterling dipped on Tuesday as investors sold the pound amid ongoing uncertainty about whether Britain and the European Union can agree a transition deal later this month for when the UK leaves the EU next year.
Agreement on a transition deal would help clear the way for the Bank of England to raise interest rates as early as May, as the market largely expects.
Hawkish signals from the central bank encouraged investors to push up the pound earlier this year before the rally ran out of steam on renewed concerns about Britain's negotiations to secure itself more favourable terms when leaving the EU.
The pound fell 0.1 percent to $1.3835 and declined 0.1 percent to 89.18 pence per euro.
"The pound continues to remain on a softer footing in the run up to the forthcoming EU Leaders Summit. Recent comments from EU officials have dampened expectations that a Brexit transition deal can be reached as soon as this month," MUFG currency analyst Lee Hardman said.
Tuesday's falls followed a more positive Monday when a survey on the crucial services sector showing UK economic activity was solid helped support the pound.
Michael Hewson at CMC Markets said the pound "could creep back towards the $1.3980 level".
While many analysts are bullish on the pound if a transition deal can be secured, uncertainty ahead of the EU leaders summit later this month, where Britain has said it expects to sign a deal, has kept a lid on sterling bulls.
Prime Minister Theresa May's landmark Brexit speech on Friday sought to convince the EU that it is in its interests to show flexibility in deciding the shape of the relationship with Britain after its exit, but markets did not see sufficient signs of progress in the talks.
The EU is due to give more feedback on its approach to the future relationship this week.
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