Sterling weakens amid mixed Brexit signals from Brussels

By Olga Cotaga

LONDON (Reuters) - The pound weakened on Thursday after Northern Ireland's Democratic Unionist Party said it could not support a Brexit deal proposed by Prime Minister Boris Johnson and the European Union, though it traded close to a five-month high.

DUP leaders said in a statement that "as things stand, we could not support what is being suggested on customs and consent issues and there is a lack of clarity on VAT."

On top of that, French junior foreign affairs minister Jean-Baptiste Lemoyne said a Brexit deal was within "arm's reach" but still not guaranteed.

Talks between Britain and the EU were continuing in Brussels as a two-day EU Summit began, with only two days left until Oct. 19, a deadline imposed by the British parliament on Johnson to reach a Brexit deal.

A deal was still possible, but that goal has not yet been reached, German Chancellor Angela Merkel said.

If a deal is not reached by then, Johnson would have to ask the EU for another Brexit extension, according to a law known as the Benn Act.

Market participants were expecting a Brexit deal to be announced on Wednesday before the summit began, given that Michel Barnier, EU's chief Brexit negotiator, had said on Tuesday that he needed a legal text agreed by the end of the day to recommend at the summit.

A senior EU official said on Thursday there would be no Brexit negotiations with Johnson at the summit, adding that "maybe we will have a deal, maybe not."

The official also said: "We are still patient, but we still did not receive text of Brexit agreement."

Sterling was down 0.2% at $1.2804, not far from the five-month high of $1.2877 reached the day before. It strenghtened slightly after Bloomberg reported Barnier saying Northern's consent was not an obstacle to a deal and that a deal was almost completed.

Against the euro, the pound was down 0.3% at 86.63 pence, after rising on Wednesday by the same extent as against the dollar.

In less than a week, sterling had managed to gain more than 6% in value against the dollar as hopes of a Brexit deal by the end of Oct. 31 have risen.

Analysts revised up their expectations of a Brexit deal by the end of the October deadline and traders cut back their short positions on the British currency.

Sterling shorts were already low, the latest data from the Commodity Futures Trading Commission showed. In the week to Oct. 8, positions fell to $5.58 billion, the lowest in three months.

"It's difficult to see a return of a no-deal Brexit risk," said Lee Hardman, a currency analyst at MUFG.

The bank now attached a 60% probability to a deal, and has lowered the probability of a no-deal Brexit to 30%. If a deal is reached, MUFG sees sterling/dollar rising back to between $1.30 and $1.35, it said. In case of a no-deal, the pound would fall sharply back towards $1.20 and beyond, the bank added.

The pound was untouched by flat monthly retail sales volumes in September in Britain, as the currency was primarily driven by Brexit developments.

(By Olga Cotaga, Editing by William Maclean)