LONDON: Sterling edged higher against the euro and the dollar after an European Union official said the bloc and Britain are very close to agreement on most issues even if they are still at odds over three main points.

Britain left the EU in January and it is in talks with the bloc on a future trading relationship, as a transition period ends on 31 December.

As time runs out for a trade deal, an EU official told ambassadors in Brussels that the EU and Britain are "both close" to reaching an agreement but differences persist over fishing rights, guarantees of fair competition and ways to solve future disputes.

"For some weeks GBP has been supported by the view that some kind of deal will be announced this month. This is still the favoured outlook, though scope for any relief rally is set to be limited by the likelihood that any deal will be a skeleton one", said Jane Foley, head of FX Strategy at Rabobank.

After being flat in earlier trade, the pound gained 0.2% versus to stand at 89.31 pence per euro at 0940 GMT. Versus the dollar, it was up about 0.1% at $1.3282..

Foley said that not only Brexit, but also COVID-19 have created some volatility for the British currency as "chief EU negotiator Barnier finds himself in a position in which he needs to self-isolate."

Chief Brexit negotiators suspended direct talks on Thursday after a member of the EU team tested positive for COVID-19, but officials continued working remotely to clinch a trade deal that would come into force in just six weeks.

Analysts at ING said that there is scope on the upside for sterling against the dollar, while they saw limited upside versus the euro given the lack of a "material announcement on the negotiations".

Foley added that if "no compromise is announced next week, growing fears about a no trade deal situation are likely to creep back into the market leaving GBP vulnerable".