LONDON - Cautious currency markets kept the pound subdued against a stronger dollar on Monday, but sterling strengthened against the euro as the current phase of Brexit negotiations was extended until Wednesday.
The dollar strengthened, equities fell, and markets were broadly risk-off. Analysts cited new lockdowns in Europe and record-high daily virus cases in the United States, as well as a lack of progress towards U.S. fiscal stimulus.
But the pound took some support from signs of progress in Brexit trade talks. The EU's chief negotiator, Michel Barnier, will be in London until Wednesday to try and clinch a deal, after which negotiations will switch to Brussels.
"Right now there’s a bit of optimism creeping in from the weekend developments - the extension of the talks until Wednesday," said Ned Rumpeltin, head of European currency strategy at TD Securities.
"The fact that France might be signalling some movement on fish is encouraging. We’ll see how that plays out," he said.
At 1051 GMT, the pound was little changed against the dollar, at $1.3051. It was up around 0.4% against the euro, at 90.58 pence.
Britain and the EU have just over two months left to agree on their future trading relationship, before a Dec. 31 deadline.
There are some hopes that a Brexit deal can be reached, with Ireland's Deputy Prime Minister and Northern Ireland minister Brandon Lewis expressing optimism on Sunday.
Asked about reports that the UK was waiting to see the result of the U.S. elections before making a decision about Brexit, Prime Minister Boris Johnson said the two were "entirely separate".
Goldman Sachs FX strategists said that Brexit developments were looking positive.
"Despite sterling's underperformance on Friday, we continue to see a path for a sharply higher GBP/USD cross into year-end," they wrote in a note.
Speculators reduced their net short position on the pound in the week to Oct. 20, for the third week running, weekly CFTC futures data showed.
TD Securities' Rumpeltin said that this could be due to a combination of market participants reining in positioning before the U.S. election and that the range of possibilities around Brexit are narrowing.
Elsewhere, news that a vaccine being developed by British drugmaker AstraZeneca and the University of Oxford produced an immune response in elderly and young people failed to bolster market sentiment.
Britain's health minister said his central expectation was for a vaccine to be rolled out for the first half of 2021.
(Reporting by Elizabeth Howcroft; editing by Emelia Sithole-Matarise, Larry King) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))