LONDON (Reuters) - The British pound skidded lower on Friday ahead of a statement from Prime Minister Theresa May on Brexit after European Union leaders rejected her plans.
The pound was already on the backfoot following the warnings from EU leaders that May must give ground on trade and the Irish border by November to clinch a Brexit agreement.
The BBC reported that May was expected to pledge that she would not be changing tack on Brexit. Her statement is due at 1245 GMT.
"Either there is compromise or a no-deal but the risk of no-deal have risen. That's why we see a reversal of sterling today," Sarah Hewin, Chief Economist, Europe, at Standard Chartered.
"The market is still taking a view that most likely outcome is a deal. At moment (sterling) seems to be moving one day at a time, one hour at a time and one headline at a time but the fundamental issue is still the same."
After a recent run of gains, which had pushed the pound to its highest since mid-July, sterling succumbed to selling pressure on Friday as traders reassessed their optimism that Brexit deal was in reach.
The pound fell to as low as $1.3142 <GBP=D3>, down almost 1 percent on the day, from an earlier level of around $1.3175. Sterling had hit two-month highs of $1.3295 on Thursday but Friday's drop - which would be the largest for more than two months - reversed those gains.
Against the euro, sterling slid 0.8 percent to 89.480 pence <EURGBP=D3>.
"The market is pricing in some chance of a 'no deal' but not much. It looks reasonably priced to me," said Lee Hardman, an analyst at MUF, who expects Britain to get an agreement.
May is racing to get the EU to sign up to her plans for life after Brexit in March next year.
The two sides remain divided over how to ensure that the border between Northern Ireland, part of the UK, and EU member Ireland remains open after Brexit, one of the biggest hurdles to agreeing a Brexit deal.
Many currency market analysts remain confident that the two sides will agree a deal given both Brussels and London have much to lose if Britain crashes out the bloc without an arrangement for trade after a departure date of March 29, 2019.
But that has not stopped many investors from hedging against more weakness in the currency should negotiations with the EU break down.
Significantly better-than-expected retail sales data and higher inflation numbers published earlier this week have provided some support to the pound.
(Reporting by Tommy Wilkes; Additional reporting by Sujata Rao; Editing by Alison Williams)