LONDON: The pound held near a 10-day low on Monday as the twin forces of a resurgent dollar and reduced expectations of a Brexit deal fuelled a selloff.
In volatile trading, sterling fell to a 1-1/2 week low of $1.2827 as negative headlines over the last 48 hours punctured growing optimism last week that an agreement between Britain and the European Commission was imminent.
It later rose about half a percent from the day's low on a Financial Times report citing the European Union's Brexit negotiator Michel Barnier as saying the main elements of a deal were ready.
However, a subsequent denial by Prime Minister Theresa May's spokesman knocked the pound back towards the lows.
"While some European officials are still sounding optimistic that an EC-UK deal can be struck in the coming weeks, the market has grown more skeptical," said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.
May's Brexit strategy has come under attack from all sides, increasing the risk that her plan for leaving the EU will be voted down by parliament and thrust the United Kingdom towards a potentially chaotic "no-deal" Brexit.
Her compromise plan, which seeks to maintain close trade ties with the EU, is facing opposition from Brexiteers, pro-Europeans, the Northern Irish party that props up her government, and even some of her own ministers.
Sterling's losses against the euro were contained thanks to a dollar rally which lifted the U.S. currency against every other rival, but the pound's drop on Monday has wiped out nearly two weeks of gains.
The increased Brexit uncertainty also pushed up implied volatility in the pound, with options on one-month maturities rising to the highest levels in nearly two years.
DEAL
The latest setback for sterling comes in a busy week for economic data with wages, inflation and retail sales figures all due even as policymakers have struck a confident outlook on the UK economy.
In an annual budget speech last week, finance minister Philip Hammond said the economy was poised for more upside after a deal with Brussels reduces uncertainty, and this would allow the Treasury to spend money to help the economy.
Britain's economy has slowed since the 2016 Brexit vote, but not as much as many economists had feared.
After the last BoE rate rise in August, Governor Mark Carney said market expectations of one rate rise a year were a reasonable rule of thumb for households and businesses.
"If a deal materializes, then the pound, by virtue of its large undervaluation, can benefit quite strongly," said Joel Kruger, market research analyst at LMAX Exchange.
Short positions in the pound are climbing. Latest futures data showed net short positions registered their biggest weekly rise in 1-1/2 months to $4.6 billion.