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.
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.