The pound fell on Monday after signs emerged that the renewed optimism about a Brexit was fading.
The BBC reported that EU chief Brexit negotiator Michel Barnier had told ambassadors on Sunday that “a big gap” remains in plans being put forward for post-Brexit customs arrangements in Northern Ireland.
The currency, which made some of its biggest gains since the Brexit referendum last week, fell by more than 0.5% on Monday to below $1.26 (GBPUSD=X).
Prime minister Boris Johnson has also reportedly told his cabinet that “significant work” is still required to bridge the impasse.
Similarly, while noting that talks had been “constructive”, the European Commission said in a statement that “a lot of work remains to be done”.
Talks will continue on Monday, with both sides still hoping that a deal can be broached in time for Thursday’s summit of EU leaders.
“The weekend mood music from EU leaders appears to have gone some way to puncturing some of the optimism about the prospects for a quick solution seen at the end of last week,” said Michael Hewson, chief market analyst at CMC Markets, in a note.
“Talks look set to continue today. However, it is hard to see any other outcome than a delay to the October deadline, with the government forced to apply for an extension by the end of the week,” he said.
“What that means for the government of Boris Johnson by the end of this week, is anyone’s guess, given his passionate refusal to countenance an extension.”
The pound had made its biggest gains since January 2017 on Friday, and at one point had been up by nearly 2%.
Optimism was mainly stoked by the outcome of Thursday’s meeting between Irish prime minister Leo Varadkar and Johnson, after which both leaders said they saw “a pathway to a possible deal.”
On Friday, European Council president Donald Tusk said he had received “promising signals” from Varadkar. Meanwhile, Barnier announced that he and Brexit secretary Steve Barclay had a “constructive meeting” and that talks between both sides would intensify over the weekend.