Sterling drops as EU's Barnier says just hours left for Brexit deal

LONDON (Reuters) -Sterling fell on Friday, reversing some of its recent gains, after European Union chief negotiator Michel Barnier warned that there were just hours left to reach a Brexit trade deal with London.

FILE PHOTO: UK pound coins plunge into water in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic/Illustration

The British currency is still on track for its best week since the end of July as market confidence has risen sharply on hopes the EU and Britain will clinch a last-minute trade deal ahead of a Dec. 31 deadline, when a Brexit transition period ends.

Almost a year after Britain formally left the bloc, the two sides are in the final stretch of talks over a post-Brexit trade deal.

The pound hit 2-1/2 year highs above $1.36 this week, but Friday’s trading session served as a reminder that the two sides still have divergent ideas on how they want to build their future relationship.

“The season finale to the Brexit soap opera appears to be heading towards a classic will-they-won’t-they last minute conclusion,” wrote Scotiabank analysts in a note. “Shorter tenor GBP vols are creeping up again as markets prep for more uncertainty running into the end of the year”.

Barnier told the European parliament that the path to an agreement was “very narrow”, while British Prime Minister Boris Johnson said the British door was open but that the EU should see sense and compromise.

Amid those words, sterling weakened to as low as $1.3473 on Friday and was at $1.3485 by 1548 GMT, down 0.7% on the day. Against the euro, it was down 0.35% at 90.71 pence.

Analysts still expect a deal, which could be agreed as soon as over the weekend.

“The latest comments are creating a little bit of doubt in markets, but most still see a deal as highly likely,” said Adrian Schmidt, head of FX strategy at Continuum Economics.

Schmidt added that the latest comments from Johnson looked like “an attempt to wring concessions out of the other side at the last minute”.

U.S. investment bank JPMorgan said the probability of a trade deal had risen to 70% from 60%.

Meantime, Bank of England policymaker Gertjan Vlieghe said the central bank may need to cut interest rates below zero for the economy to fully recover, according to Bloomberg TV.

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