Sterling falls after EU dismisses UK 'spin'

LONDON (Reuters) - Sterling was set to end at a loss on Thursday after markets swung on contradicting assessments of prospects for Britain and the European Union to reach a Brexit deal.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo

The pound had a tumultuous day, rising and falling in direct response to Brexit-related news, as Britain and the EU neared the end of the last scheduled round of trade talks before the bloc’s leaders assess progress on Oct. 15-16.

A Reuters report that British and EU trade negotiators had failed to bridge their differences on state aid saw sterling fall to as low as $1.2819 in the morning.

It then reversed course and rose to as high as $1.2979 after a Financial Times reporter tweeted here that a "landing zone" for state aid had been identified and that fishing - long a source of friction - remained the last sticking point.

Three hours later, it flipped again, falling sharply after an EU official dismissed the tweet as unfounded “UK spin”.

“If the headlines continue and we’ve got the EU/UK updates which continue to remain bullish to the pound one moment and bearish to the pound one moment – and my guess is that’s what we do have in store – volatility will be greater and the potential ranges for the pound on a daily basis will be greater as well,” said Neil Jones, head of FX sales at Mizuho.

At 1458 GMT, the pound was at $1.2868, down 0.4% on the day.

Versus the euro, it was down 0.4% at 91.205 pence, having swung between 91.55 and 90.65 during the day.

(Graphic: GBP )

A gauge of sterling overnight volatility rose to its highest since March.

“Three-month volatility could be an interesting play as well,” Mizuho’s Jones said, noting that this covers the period up to the Dec. 31 deadline after which the UK will leave its status quo transition period with the EU.

The EU on Thursday launched a legal case against Britain over its new Internal Market Bill that undercuts earlier commitments made by London in its Brexit divorce treaty.

Britain’s lower house of parliament approved the Internal Market Bill on Tuesday and it is now with the upper house.

“The Internal Market Bill legal action was expected and not news to the market, but sterling is very sensitive to Brexit headlines as the deadline approaches,” said Ian Tew, a sterling trader at Barclays.

“Today’s news once again made the market nervous that a deal or the tunnel is not imminent, taking away from any recent positive sentiment and therefore GBP unwinding gains,” he added. The “tunnel” is a term to describe intensified negotiations between small teams to reach a compromise.

(Graphic: Sterling most volatile G10 currency )

Reporting by Elizabeth Howcroft; Editing by Hugh Lawson and Andrew Cawthorne