The pound rose on Monday, buoyed by reports of progress on the Irish border question, an obstacle to Brexit that diplomats will seek to overcome at a European Union summit later this week.
Sterling has benefited recently from reports on behind-the-scenes efforts to work out how to manage the Irish border if Britain also leaves the single market and customs union.
A report published by The Times on Monday said that EU chief negotiator Michel Barnier is working on a plan to minimize physical checks at the border between the two Irelands by tracking goods using barcodes on shipping containers.
The first of three summits on the terms of Brexit will be held this week, and EU leaders hope a deal can be struck within the next two months. The talks could determine how orderly Britain's March 2019 withdrawal will be and what kind of economic impact it and its neighbors face.
"Sterling could out-perform this week if the EU decide to adopt a more flexible stance on Brexit at the EU summit," said Chris Turner, head of foreign exchange strategy at ING. The pound could rise to 88.50 pence against the euro, he said.
Sterling on Monday traded up 0.2% at $1.3086 , closing in on a six-week high of $1.3145. It was flat against the euro at 89.02 pence.
Sterling has reversed nearly all of its losses against the dollar in August, when fears of a no-deal Brexit surged and last week it gained 1.2%.
Other analysts expressed caution, though.
"The moderate recovery of sterling we saw over the past weeks is justified. But for all those who have to manage their sterling risks beyond the Brexit date, the problem of how to plan ahead persists, of course," said Ulrich Leuchtmann, a currency strategist at Commerzbank in Frankfurt.
Despite growing confidence Britain can land a Brexit deal, domestic political uncertainty remains high.
Leaders of Germany and Austria said over the weekend they wanted to avoid a hard Brexit at all costs, but the biggest obstacle to a compromise might be hard-line Brexiters in Prime Minister Theresa May's own party.
Britain's opposition Labour party will vote against May's Brexit plans, a senior Labour lawmaker told the Financial Times last week.
The final rounds of Brexit negotiations may determine what the Bank of England does next. Most economists polled by Reuters don't expect interest rates to rise again until after Britain's exit. (Reuters)