LONDON, Oct 16 — Sterling weakened from five-month highs and stocks in London dropped today on concerns that talks between Britain and the European Union to secure a Brexit deal could fall apart.

In another highly volatile day of trading for UK assets, financial markets remained hostage to Brexit headlines as British Prime Minister Boris Johnson and EU negotiators raced against time to agree a withdrawal deal.

Sterling has surged some five per cent since late last week when London and Brussels restarted intense Brexit talks.

But today, sources in the bloc said the talks had hit a “standstill”.

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Disagreements centre on a future trade deal and the rejection by Northern Ireland’s Democratic Unionist Party of customs solutions tentatively agreed by negotiators for the Irish border.

Sterling and stocks fell on the news before recovering some ground after a report stated that the EU’s chief negotiator, Michel Barnier, had told commissioners he was optimistic of getting a deal done today.

“It looks like a deal is being worked on but everyone who works with the EU knows that these deals happen at the last minute,” said Kit Juckes, head of currency strategy at Societe Generale in London. “It seems more likely than not that we will need an extension.”

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At 1005 GMT, sterling was down 0.3 per cent at US$1.2731 (RM5.34), off session lows but also below a five-month high of US$1.28 hit yesterday.

Against the euro, the pound was also 0.3 per cent weaker on the day at 86.59 pence —  also off five-month highs.

Sterling trading volumes have surged in recent days. Yesterday investors bought and sold more pounds than on any single day since November 2018, according to Refinitiv data.

British and EU officials resumed talks today, a few hours after late-night negotiations wound up, but it was far from clear they would reach an agreement before the summit tomorrow.

Brexit minister Steve Barclay said today he would not consider accepting a delay to Britain’s EU exit beyond October 31, even if it was only used to tie up the necessary legal requirements of an agreement.

London-listed companies that make their cash at home, from housebuilders to banks, today reversed some of the ground gained since last week.

These domestically focused stocks, some of the world’s most unloved shares in recent years, have seen their fortunes transform since Friday — JPMorgan’s domestic basket has outperformed London-listed exporter peers and the blue-chip FTSE 100.

“There is a sense that we are moving towards a deal and the market is covering its shorts and justifiably so,” said Neil Mellor, senior currency analyst at BNY Mellon, referring to investor bets on sterling weakness.

“But I would be cautious in chasing sterling higher, especially against the euro.”

Trading in sterling options suggested high volatility in the currency was likely one way or another.

British government bonds benefited from the renewed uncertainty, with 10-year yields down three basis points at 0.66 per cent .

With the spotlight on Brexit, September inflation data had little market impact.

Britain’s inflation rate failed to rise as expected last month as petrol prices fell at the fastest rate in more than three years, a boost to consumers ahead of Brexit. — Reuters