Pound pulls back from three-month highs as hopes dim over Brexit agreement

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Fresh concerns that U.K. and European leaders may not reach a deal by October 31 weighed anew on the pound Monday, yanking it down from a three-month high seen late last week.

The pound slumped to $1.2573 against the dollar, a drop of 0.6% on the session so far.

Sterling saw its best two-day run in over a decade late last week. On Friday, it reached as high as $1.2706, its strongest since Theresa May was prime minister before Boris Johnson took over in July. On Thursday, the pound saw its best single-day percentage gain since March.

The gloom returned for sterling amid reports that European Union and British negotiators, who were working over the weekend to reach a deal before the Oct. 31 deadline, hadn’t made a breakthrough as of Sunday evening, The Wall Street Journal reported. Given how divided the two sides are, even a deal outline looked tough, said diplomats cited in the report.

“A lot of work remains to be done,” the EU said in a statement, following a briefing by the union’s chief negotiator Michel Barnier to EU diplomats. EU leaders will meet on Thursday and Friday to see if they can reach an accord.

The pound rose Friday after European Council President Donald Tusk said he had received promising signals from Ireland’s Leo Varadkar that a deal was possible. Attempts to reach a deal have run into difficulties over plans for keeping an open border between EU member Ireland and the U.K.’s Northern Ireland.

Read: Brexit deal not there yet, says Irish foreign minister

Even if U.K. negotiators reach an agreement with Europe, any deal could still see resistance in the U.K. Parliament, analysts noted.

“There is only a slim chance of seeing a Brexit deal, which would make everyone happy, reached within the next two weeks. The most plausible scenario would be the extension of the Brexit deadline,” said Ipek Ozkardeskaya, senior market analyst, at London Capital Group.

But not everyone was negative on the prospects of a deal. Nordea Investment’s senior macro strategist, Sebastian Galy said he thinks the U.K. is probably closer to a deal than markets believe. “This tells in crunch time as it did with Spain, Greece and Italy,” he told clients in a note, adding that the Labour Party probably doesn’t want to be credited with a so-called hard Brexit.

“The odds of a deal that can be passed by parliament are therefore under-estimated by the market with obvious implications for the pound, U.S. assets, German/French/Netherland equities. Common sense is said to be an uncommon valor, yet I would bet that it has been found again,” said Galy.

The FTSE 100 was down 0.6% to 7,200.86.