March 7, 2019 / 12:30 PM / 5 months ago

UPDATE 3-Sterling posts biggest loss in 7 weeks on Brexit deadlock

* Pound gains against the euro after dovish ECB move

* Volatility gauges on pound tick higher

* GRAPHIC-World FX rates in 2019: tmsnrt.rs/2egbfVh (Updates to late U.S. market action)

By Saikat Chatterjee

LONDON, March 7 (Reuters) - Sterling recorded its steepest loss against the dollar in seven weeks on Thursday after British and European Union sources said Brexit negotiations had hit an impasse.

Nothing suggests anything will change in Britain’s Brexit talks with the European Union over the next 48 hours, a government source said on Thursday, adding that the EU was simply not moving.

EU Brexit negotiators rejected the latest proposals on the Irish backstop presented by Britain’s Attorney General Geoffrey Cox in Brussels on Tuesday and told him to rework them and come back on Friday, EU diplomats said.

The pound fell to $1.3075, down 0.73 percent, marking its biggest one-day drop against the greenback since Jan. 18. It touched $1.3067, the lowest level since Feb. 25.

Against a weaker euro, it gained 0.37 percent at 85.55 pence versus the euro after the European Central Bank delayed a possible interest rate increase until 2020 and will restart a program to make cheap loans to banks.

“Hope for any early success for the British government is all but gone now,” said John Marley at FX risk management specialist, Smart Currency Business.

Further adding to the uncertainty was an amendment passed by Britain’s House of Lords on Wednesday calling for the government to negotiate a customs union with the European Union, giving May a potential new headache in her Brexit plans.

“Markets are getting conflicting signals from lawmakers in Britain and the negative news flow from Brussels on the negotiation process and that is keeping the pound in a tight range,” said Nikolay Markov, a senior economist at Pictet Asset Management.

In afternoon U.S. trading, Bloomberg, citing people familiar with the EU side of the Brexit talks, reported the EU offered a proposal aimed to make the Irish backstop more acceptable among British lawmakers in a bid for them to approve a Brexit deal. But EU’s latest offer falls short of what Britain wants.

Most economists in a Reuters poll thought Brexit would be delayed by a few months and the two sides would eventually agree to a free-trade deal, according to the poll conducted between Feb. 28 and March 5.

Expected gauges of market volatility in the pound ticked higher though it remained well below levels seen in November 2018.

Reporting by Saikat Chatterjee and Tom Finn in London Additional reporting by Richard Leong, Saqib Ahmed Editing by Jon Boyle and Lisa Shumaker

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