EU negotiators fail to agree on Gibraltar before Brexit summit
European Union negotiators from the 27 states remaining after Brexit were unable to agree on Gibraltar during talks on Friday, diplomatic sources said of the outstanding issue before Sunday's summit of the bloc's leaders to seal the deal.
Sterling fell a quarter of a percent on Friday as Spain's eleventh-hour objections over Gibraltar before a Sunday summit to endorse the Brexit deal prompted some traders to take profits after an overnight rally.
The British currency briefly rallied more than a percent on Thursday on news that Britain and the European Union had agreed a draft text setting out a close post-Brexit relationship, bringing relief to companies and investors after months of tense negotiations.
It ended up 0.8 percent on the day, scoring its biggest daily rise in 10 days.
"The Spain news is keeping sterling subdued even though broad expectations are for the deal to be agreed on Sunday but there are bigger tests ahead before the currency can rally meaningfully," said Morten Helt, a senior FX strategist at Danske Bank.
Against a broadly subdued dollar, the British currency fell 0.3 percent to $1.2838 while it was broadly flat against the euro at 88.57 pence.
Spain has asked for changes to the withdrawal treaty and its Prime Minister Pedro Sanchez said he will veto the draft deal on Britain's exit from the EU if no changes are made.
Though the British currency is trading at the lower end of recent trading ranges and remains one of the most undervalued currencies on a trade-weighted basis, investors are wary of buying the pound at these levels on political concerns.
"While the EU appears practically certain to accept it, the same cannot be said for UK lawmakers, as nearly every faction of Parliament – including Labour, Tory Brexiteers, pro-EU moderates, and the DUP – has threatened to vote it down," said Marios Hadjikyriacos, an analyst at broking firm XM.Com.
Despite a recent drop in short sterling positions, overall bets remain large at $3.8 billion.
Earlier, Gibraltar's chief minister said they have worked with Spain to reach agreement over its place in the Brexit withdrawal agreement, adding that any revision of the enclave's place in the deal would reopen the whole agreement to renegotiation.
"We've worked very hard and have in fact reached agreement with Spanish colleagues in respect of Gibraltar's role in the withdrawal process... in good faith, we've worked together and we've delivered," Fabian Picardo told BBC radio, adding that Spain did not need to use a "veto" to bring Gibraltar to the table.
"If (the withdrawal agreement is) opened for one comma or one full-stop on Gibraltar, it's going to be re-opened on any of the other issues."