EU negotiator Michel Barnier accused the British government on Tuesday of clinging to "illusion" while time runs out for a Brexit deal to avoid massive disruption when Britain leaves the European Union next year. The draft is due around 1100 GMT.

"Signs of Brexit nerves in markets have become more evident this week and it is completely understandable when investors are confronted with headlines stating that there are still 'sticking points' between the UK and EU in regards to a transition deal," said Viraj Patel, an FX strategist at ING in London.

While sterling has gained nearly 3 percent this year against the dollar thanks to the greenback's struggles in the opening weeks of 2018, it has only gained 1 percent against the euro in that period and has remained well within a 87-89 pence per euro range.

On Wednesday, sterling was trading 0.2 percent lower at $1.3893 while it was broadly flat at 87.88 pence against the euro.

It remains considerably below a post-Brexit referendum high of $1.4346 hit late last month.

As more Brexit-related headlines have emerged in recent weeks, investors have whittled down long positions in sterling despite some optimistic comments from central bank policymakers in recent weeks.

British officials accuse Brussels of eschewing creative solutions to avoid trade disruption, while EU leaders complain that Prime Minister Theresa May's divided government is failing to make its intentions clear.

Barnier spoke of "significant points of disagreement" on the transition, and suggested Britain was trying to keep it open-ended. EU governments are keen that it does not become a long-term arrangement, though most are willing to consider extending it into 2021 if a future trade deal takes longer to take effect.

Latest positioning data by Commodity Futures Trading Commission on Friday showed that long sterling positions were down substantially, at $8.2 billion compared to nearly $33 billion in late January.