By Sujata Rao
LONDON, May 21 (Reuters) - Sterling fell below $1.27 for the first time since mid-January, battered by dollar strength and growing fears that UK Prime Minister Theresa May will fail to persuade cabinet colleagues to back an amended version of her EU withdrawal deal.
Brexit uncertainty has grown in recent weeks after the breakdown of talks between May and the opposition Labour party. That has set the stage for the thrice-rejected fail to fail again if, as planned, it is put to vote in parliament next month.
Also weighing on the pound in recent weeks has been a firmer dollar, which has benefited from an escalation in trade tensions between Washington and Beijing.
Rejection of the deal yet again would likely pave the way for May to be replaced by a more hardline eurosceptic Tory, possibly Boris Johnson.
The Times newspaper quoted a senior source as saying the government was prepared for resignations after the cabinet meeting where May would ask ministers to back concessions to Labour to get a Brexit agreement over the line.
But pro-Brexit hardliners will almost certainly reject any effort to soften the proposal, which could include an offer to stay in a customs union with the EU.
"There's been an accumulation of disappointments since the start of this month as it's become clear the talks with Labour had stalled. The possibility of some kind of agreement had generated relative stability since late-February but that's over now" said Neil Mellor, a strategist at BNY Mellon.
Trepidation about the upcoming cabinet meeting was adding to nervousness, he said, adding: "It's all much of the same, the uncertainty is what's doing the damage."
The pound slipped 0.2% to $1.2688 while against the euro it was down 0.14% to a new four-month low of 87.88 pence GBP=D3, EURGBP=D3.
Sterling's weakness was exacerbated by the dollar rising to 2-1/2 week highs against major currencies, thanks to safe-haven flows sparked by the U.S.-China trade row .DXY
On derivative markets, implied volatility gauges or expected swings in the British currency were still holding at more than one-year lows plumbed last month GBP1MO=.
Positioning indicators were broadly neutral, with long positions in the pound being pared back in recent weeks, leaving the pound vulnerable to any negative political news.
Sterling under $1.27https://tmsnrt.rs/2EpMrFg
(Reporting by Sujata Rao Editing by Andrew Heavens and Jon Boyle)
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