* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Tommy Wilkes and Jemima Kelly
LONDON, March 7 (Reuters) - Sterling touched a three-month low against the euro on Wednesday before rebounding, as the release of the European Union’s draft guidelines for a future trade deal with Britain underlined the gap between the two sides as they negotiate a Brexit deal.
British finance minister Philip Hammond said that financial services should be at the heart of a new trade deal but the EU has rejected that approach and wants to limit the sector’s market access after Brexit.
Brussels has refused to let Britain pick and choose the parts of the EU’s single market to which it can continue to have free access, chief among them the United Kingdom’s large financial services industry.
Britain is racing to clinch a Brexit transition deal that Hammond repeated on Wednesday would be concluded later this month, but uncertainty about whether that is feasible has weighed on the pound, even as more hawkish signals from the Bank of England about rate rises this year have supported the pound.
Sterling slipped as much as 0.4 percent against a broadly stronger euro ahead of the speeches, hitting 89.68 pence per euro, its weakest since Nov. 28. It later recovered and was up 0.1 percent at 89.22 pence per euro as the single currency sold off broadly.
Against the dollar, the pound traded flat at $1.3892 .
“We are still looking at a vast divide between what Britain wants and where the EU expects the UK to be,” said Ken Odeluga, a market analyst at City Index.
Analysts said sterling was also being weakened by a risk-off mood across markets on the back of worries about a trade war led by U.S. President Donald Trump’s administration, and by concerns over the impact that such a trade war might have on Britain.
“We view trade protectionism risk aversion as sterling-negative,” wrote MUFG global markets strategist Derek Halpenny in a note to clients. “This is increasingly looking like a global environment that is unfavourable for the UK and the task that lies ahead in dealing with Brexit,” he added.
A Reuters poll of analysts on Wednesday found sterling is set to trade slightly higher in a year’s time, near the $1.41 level, less than a month before Britain is formally due to leave the EU, indicating currency strategists remain optimistic London and Brussels can manage a smooth exit and transition deal.
Earlier, data showed British house prices rose at their slowest annual pace in nearly five years last month, in the latest sign of weakening in the housing market as Britain approaches its departure from the European Union. (Editing by William Maclean)