Sterling rallied on Thursday to two-month highs on forecast beating British retail sales data and growing optimism that Britain and the European Union are making significant progress towards a Brexit deal at an EU leaders summit.
British retail sales jumped 3.3% in August compared with the same month a year earlier, better than all forecasts in a Reuters poll of economists, as shoppers maintained their strong summer spending spree.
In monthly terms, sales rose by 0.3% in August from July, the Office for National Statistics said, defying a median forecast for a fall of 0.2%.
The pound extended its gains even further to rise to $1.3229 , up 0.6% on the day, after a French official said London and Brussels should make as much progress as possible towards a Brexit deal by October. The EU was also prepared to hold a November summit to get an agreement over the line, the official said.
Against the euro, the British currency rallied 0.3% to hit 88.535, its best level since July 17.
"The UK continues to churn out solid economic indicators. Positive for $GBPUSD," David Madden, an analyst at CMC Markets, said on Twitter.
UK consumer prices rose at their fastest in six months in August, data released on Wednesday showed, providing further support to the pound.
But negotiations on Britain's departure from the European Union remain the dominant driver for the pound.
Investors have pushed the pound to its highest since July this week as they grow confident that a Brexit trade deal - helping Britain avoid a disorderly exit from the EU - can be clinched in the coming months.
Cabinet Office minister David Lidington said on Thursday Britain was more than 85 percent of the way to agreeing a deal.
But there remains a way to go. Prime Minister Theresa May, speaking at the EU leaders summit in Salzburg in Austria on Wednesday, urged her EU counterparts to drop what she said were unacceptable Brexit demands that she said could rip Britain apart.
"On we go with Brexit talks as the EU summit in Salzburg tries both to be tough on the UK and get a deal onto the table," said FX strategists at Societe Generale.
"The Irish border issue remains the chief stumbling block to a deal, while the EU prepares for a November summit where it hopes an agreement will be sealed. EUR/GBP is for now clinging onto the uptrend support line drawn from the April low." (Reuters)