Sterling rose a quarter of a percent on Tuesday as hopes grew of a Brexit deal breakthrough, encouraging investors to buy the British currency with the struggling dollar also fuelling gains.
The European Union is preparing to back a compromise proposal on the Irish Border to resolve the last major hurdle in negotiations, The Times reported on Monday.
The pound touched a two-week high of $1.3085 in early trade. Against the euro it rose 0.1 per cent to 87.25 pence, close to a five-month high of 87.23 pence hit on October 10th. But sterling trimmed gains to stand 0.2 per cent up on the day at $1.3063 after trade minister Liam Fox said it was impossible to say if a deal could be reached this month or next.
While officials have made progress towards a deal in recent days, cabinet support for any exit agreement is essential for prime minister Theresa May, whose ruling Conservative Party is deeply divided over Brexit. "It looks like we are getting closer to a deal but the support of the cabinet and parliament ...will decide whether sterling should be at 1.40 or 1.20," said Alvin Tan, currency strategist at Societe Generale in London.
Hopes of a deal have lifted the pound in recent days. It has risen 3 per cent versus the dollar this month. Some unwinding of short positions has also helped sterling. While net shorts have shrunk slightly from more than two-year highs in September, they remain near historical highs.
European shares, meanwhile, ticked lower and the dollar and bond markets barely budged on Tuesday, as traders braced for midterm elections in the United States and some potentially lively sessions ahead.
Japan and Hong Kong had helped Asia overcome another Chinese wobble, but Europe slipped into the red early on as investors pounced on some corporate earnings misses and pre-US midterms caution took hold. The elections mark the first major test of president Donald Trump's sweeping tax cuts and hostile trade policies.
Polls point to his Republican party losing control of the House of Representatives which could curb some of his policymaking power. The dollar dipped against the euro and sterling , but made up ground on the Japanese yen as dealers kept their options open after the US currency’s bumper year so far.
