Sterling erased earlier gains on Wednesday after the Northern Irish party that supports the British government said it would emphatically oppose a reported European Union concession on the Irish backstop under any Brexit deal.
EU officials said that a report in the Times newspaper – which said Brussels was prepared to offer a mechanism for the Northern Irish assembly to leave a new so-called backstop after a number of years – was untrue.
Proposals for what happens on the Irish border after Brexit are the main sticking point preventing London and Brussels from agreeing a Brexit withdrawal deal.
A senior diplomat dismissed the Times report as "spin" in the negotiations, while another official said that "no bold new offer is coming from the EU side at this stage."
The pound had jumped more than 0.5% against the U.S. dollar after the Times newspaper published its report, but the chief whip of Northern Ireland's Democratic Unionist Party said it would oppose any such concession, sending sterling back down to $1.2210, flat on the day.
The British currency was last up 0.1% at $1.2223, after spiking to as much as $1.2292. It also touched highs against the euro of 89.38 pence but was last down 0.1% at 89.81 pence.
"Sterling had fared better and rebounded this morning but is now falling back again," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
"This shows that there is a recognition that there isn't a substantive breakthrough in the Brexit talks," he said.
Justin Onuekwusi, a fund manager at Legal & General Investment Management, said: "It's very unlikely we get a hard Brexit on Oct. 31 but the worsening relationship between the EU and UK means the risk of this goes up a little bit."
Sterling had been on the back foot in early London trading on media reports that British Prime Minister Boris Johnson faced a rebellion in his cabinet if he led Britain into a no-deal Brexit.
The Guardian reported that the EU may offer to extend the Brexit deadline until June 2020.
Jane Foley, a senior foreign exchange strategist at Rabobank, said the Guardian article showed "the odds increasing of a delay until summer next year."
Johnson has consistently said the United Kingdom will leave the EU on Oct. 31 with or without a deal.
According to weekly futures data, short volumes on the pound have declined in the last week, yet a net short position means the market is particularly sensitive to signs of positive news. (Reuters)