Sterling dipped and rebounded on Wednesday as Brexit-related news kept traders guessing about how the situation in Brussels was developing, dealers said.
In a volatile week, the pound was catapulted on Tuesday to the highest levels against the dollar and euro since May, as negotiators voiced optimism that they could strike an agreement that would avoid the UK crashing out of the EU without a deal on October 31.
Following early losses on Wednesday, sterling bounced back and was still trading at elevated levels later in the day.
"The pound is once again finding support, reaching new five-month highs this Wednesday when it touched $1.2840, as currency markets move to price in increased chances of a deal being reached between the UK and the EU," said Ricardo Evangelista, a senior analyst at ActivTrades.
With the two sides hunkered down in Brussels, 10 Downing Street said British Prime Minister Boris Johnson had held a "constructive" and "good discussion" with French premier Emmanuel Macron, who also hailed "positive momentum" for the talks.
The EU's chief negotiator Michel Barnier said a text must be on the table by early on Wednesday if it is to be put before leaders at the two-day EU summit starting on Thursday.
But officials said talks could always resume next week and a special summit be called in time to allow Mr Johnson to fulfil his pledge to lead Britain out of the bloc by the end of the month.
The developments indicate some sort of agreement on the vexed question of Northern Ireland in the divorce, which had been holding up negotiations.
Signs of a breakthrough sent the pound rallying to $1.28 (Dh 4.70) in London on Wednesday morning.
"It may still tease and disappoint us, but it seems increasingly likely that an acceptable draft Brexit agreement may emanate from the corridors of power in Brussels shortly," said OANDA senior market analyst Jeffrey Halley, who also said the pound could soar to $1.45.
But traders were warned to be cautious as there remained a number of obstacles.
"How many times have we been down this road in the last three years, as talks have faltered over the Gordian knot of Northern Ireland," said Michael Hewson, chief market analyst at CMC Markets UK.
"Not only does any deal have to pass muster with the EU, it also has to get past Northern Ireland's Democratic Unionist Party, as well as MPs in the House of Commons."
Traders are snapping up options that insure against big moves in the currency, as the pound faces two sharply different paths.
A deal and parliamentary approval could see the rally extended but failure could send the UK toward an economically disruptive no-deal outcome and a sterling plunge to as low as $1.11, according to strategists in a Bloomberg survey.
