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Sterling slips as Brexit deal hangs in balance

Sterling slips as Brexit deal hangs in balance
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LONDON (Reuters) – Sterling weakened on Monday, giving up some of last week’s strong gains after the European Union and Britain said a lot more work would be needed to secure an agreement on Britain’s departure form the bloc.

The pound was down 0.6% at a session low of $1.2568. Against the euro, the British currency was also 0.6% weaker at 87.76 pence.

A Brexit deal was hanging in the balance on Monday after diplomats indicated the bloc wanted more concessions from Prime Minister Boris Johnson and a full agreement was unlikely this week. [nL5N26Z1PM]

Though the mood music for the pound’s short term outlook has improved considerably, market watchers including UBS caution there are a few hurdles before Britain and the EU can agree a deal.

What compromises each side may be prepared to make will be key, with too many concessions by the EU potentially compromising the integrity of the single market while the British side will be hampered by internal political obstacles, according to UBS.

“With time tight and much ground to cover we still, on balance, believe that the UK will be asking for a further extension to Article 50,” Dean Turner, an economist at the bank said.

Sterling rocketed higher at the end of last week, posting its biggest two-day gain for several years, after Britain and the EU announced the surprise restart of negotiations to agree a withdrawal arrangement before the scheduled Oct. 31 Brexit date.

Britain on Sunday said the latest talks had been “constructive” and there would be more talks on Monday.

Reflecting the near-term uncertainty, shorter-dated volatility gauges for the pound around the one-week segments have soared with one-week maturities trading above 15 vol, more than double last week’s reading.

Latest positioning data showed a further unwinding of extreme short positions though they still remain large by historical averages indicating any news of a Brexit deal could send the pound sharply higher.

(Graphic: GBP Positions https://fingfx.thomsonreuters.com/gfx/mkt/12/7322/7253/GBP%20Positions.png)

(Reporting by Tommy Reggiori Wilkes; Additional reporting by Saikat Chatterjee; Editing by Kirsten Donovan)

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