LONDON: Sterling consolidated gains after a three-day rally, as a dollar rebound and hopes of an imminent Brexit deal prompted investors to take profits.
The dollar shook off its post-midterm election blues and rallied a quarter of a percent against its rivals before a U.S. Federal Reserve policy meeting where it is widely expected to hold interest rates.
British Prime Minister Theresa May stepped up attempts to court European support for a Brexit deal as negotiations on securing a smooth British divorce from the world's biggest trading bloc enter their final stages.
While the pound has benefited this week from signs Britain is closing in on a deal with the European Union less than five months before it is due to leave the bloc, market analysts said the British currency was ripe for a spot of profit-taking.
Sterling has risen 3 percent versus the dollar this week in spite of unresolved differences over the Irish border.
It is still unclear if enough progress has been made in time to hold an emergency summit of EU leaders in November to sign off on a deal.
Against a recovering dollar, the pound edged 0.2 percent lower to trade at $1.3106, below a two-week high of $1.3176 hit on Wednesday. It traded broadly flat against the euro at 87.01 pence.
"The FX market still seems to be hoping for an amicable agreement, as a glance at volatilities illustrates that it remains quite relaxed as far as March 2019 is concerned," said Antje Praefcke, a currency analyst at Commerzbank.
"However, I urge caution: there is still resistance within the British cabinet," she added.
A crucial cabinet meeting on May's proposed deal with the EU meant to take place this week was delayed amid a row over whether to provide full legal advice to ministers on the customs backstop, the Guardian reported.
If the cabinet does agree to May's deal, an EU summit could be held before the end of November.
A backstop has been deemed necessary to ensure there is no return to a hard border in Ireland if the UK and the EU are unable to secure a long-term free trade deal after the end of a Brexit transition period in 2020.
Headlines on the progress of Brexit talks have made the pound increasingly jumpy. Implied volatility on one-month pound options, a gauge of expected swings, is at its highest level since February. The currency has faltered in seven of the 10 months of this year so far.