LONDON: Sterling fell from five-month highs against the euro and dollar on Wednesday, with talks to secure a Brexit deal expected to go down to the wire before an European Union summit.
British and EU officials were to resume talks on Wednesday, a few hours after late-night negotiations wound up, but it was far from clear they would reach an agreement before the summit on Thursday.
A report on Tuesday negotiators were closing in on a draft Brexit deal sparked a surge by the pound and raised hope across world markets that a significant source of uncertainty would be removed. But the pound weakened on Wednesday as a note of scepticism appeared to return.
At 0735 GMT, sterling was down 0.7 per cent at US$1.2702, after gaining 1.5 per cent to a five-month high of US$1.28 on Tuesday. Against the euro, the pound was almost 0.7 per cent weaker on the day at 86.88 pence - also off five-month highs from the day before.
"There is a sense that we are moving towards a deal and the market is covering its shorts and justifiably so," said Neil Mellor, senior currency analyst at BNY Mellon, referring to investor bets on sterling weakness. "But I would be cautious in chasing sterling higher, especially against the euro."
Trading in sterling options suggested high volatility in the currency was likely one way or another.
With the spotlight on Brexit, September inflation data due out at 0830 GMT were not expected to have a major impact.