By Ritvik Carvalho
LONDON (Reuters) - Sterling climbed above $1.25 on Tuesday to its highest in a month as signs that Britain might be willing to compromise on sticking points in Brexit negotiations with the European Union provided support.
Britain is expected to indicate flexibility over fisheries and trade rules if the European Union agrees to lessen its demands regarding regulatory alignment and fishing access, the Times newspaper reported on Tuesday as a new round of talks kicks off.
Britain has until July 1 to ask for an extension to the current transition period, which ends in December.
By 1511 GMT, the pound was trading 0.4% higher to the dollar at $1.2513
Against a broadly stronger euro, it was up 0.1% at 89.15 pence. (EURGBP=D3)
"Despite what is likely to be a period of high Brexit headline risks for UK assets in the coming weeks and months, a report that the UK may be willing to compromise in upcoming Brexit negotiations - along with broad-based US dollar weakness due to the idiosyncratic risk posed by nationwide U.S. protests - is keeping the pound underpinned against the dollar," said Viraj Patel, FX and global macro strategist at Arkera.
Weekly positioning data for the week ended May 26 showed the market's net short position on the pound increased for the twelfth week running. The last time investors were this bearish on the pound was in the run-up to the December 2019 election.
"The fading prospects of an extension to the post-Brexit transition period, and the risk of supply chain disruption at the start of 2021 (either without a trade deal or with a soft, narrowed deal), are to weigh on sterling in coming days and weeks," strategists at ING wrote in a research note.
"Although sterling rallied yesterday in line with the recovery in general risk appetite, the forthcoming UK-EU trade negotiations overhang should dominate and weaken it this month."