Sterling driven by weaker dollar; investors eye month-end for trade deal

By Olga Cotaga

LONDON (Reuters) - The pound continued to be driven up by the weaker U.S. dollar on Thursday and stayed neutral versus the euro as investors assessed the probability of Britain signing a trade deal with the European Union by the end of the year.

The British currency gave back some of its gains after a meeting between the EU and British chief negotiators scheduled for Friday to wrap up this week's round of future relationship talks was cancelled.

This month is crucial for sterling as by the end, it should become clear whether Britain will walk away with a deal or not.

"The second to last week and the last week of July are going to be the extreme Brexit crunch point," said Stephen Gallo, European head of FX strategy at BMO.

"If there's not movement by the week of 20th or the week of 27th, that may be the second wave of selling in sterling," Gallo said.

The pound traded last at $1.2499 <GBP=D3>, up 0.2% on the day, after touching an eight-day high of $.1230.

It has improved in the last couple of days, but prior to that it kept falling for nearly all of June, losing 2.7%.

Against the euro, sterling was steady at 90.19 pence <EURGBP=D3>.

Speculators have added some short positions on the pound in the week to Friday, as net shorts reached $1.44 billion, according to latest CFTC data.

Sterling implied volatility levels are higher than that of other major currencies, as costs for one-month option contracts get pricey, suggesting investors are more worried about where the pound may end up in a couple of months.

One-month implied volatility gauges in the pound <GBP1MO=FN> were last at 8.3%, compared with 6.75% for the euro. <EUR1MO=FN>.

(Reporting by Olga Cotaga; Editing by Robert Birsel and Emelia Sithole-Matarise)