Sterling extended its earlier gains to move above $1.31 on Thursday after a media report that Britain and the European Union had made progress on the Irish border question, a major hurdle to agreeing a Brexit deal.
A report published by Bloomberg said that the UK had agreed to an EU request for information that could help end a dispute over the Irish border.
The EU has made a so-called "backstop" proposal to guarantee an open UK-EU land border inIreland a condition for any divorce deal before Britain leaves the bloc on March 29, 2019.
ING analyst Viraj Patel said that if confirmed, agreement over the Irish border would "effectively wrap up the withdrawal agreement and take a no-deal Brexit off the table."
The pound, already up after disappointing U.S. inflation data hurt the dollar, extended its gains to hit as high as $1.3124, its strongest since Aug. 2 after the Bloomberg report, analysts said.
Against the euro, sterling fell 0.1 percent against a broadly stronger single currency to 89.14 pence.
Sterling was also helped on Thursday by the Bank of England raising its forecast for third-quarter GDP growth, to 0.5 percent from 0.4 percent.
The BoE's Monetary Policy Committee voted 9-0 to leave interest rates at 0.75 percent, a month after tightening policy for only the second time since the 2009 financial crisis.
Most economists are not predicting a further rate rise until after Britain leaves the EU in March 2019.
"The main message is that they are in wait and see mode," Lee Hardman, an analyst at MUFG, said.
British government bond yields also rose on Thursday. The yield on the 1.625 percent 2028 gilt, the new 10-year benchmark, hit a high of 1.525 percent at 1413 GMT, shortly after the report on the Irish border talks. As of 1515 GMT it stood at 1.505 percent, up 2 basis points on the day.
The exporter-heavy FTSE 100 stock index was 0.4 percent lower in late European trading.
After plunging in August, sterling has strengthened in recent days on hopes Brussels and London can agree a Brexit trading deal.
Those gains have been tempered, however, by uncertainty over whether Prime Minister Theresa May can convince members of her Conservative Party demanding a sharper break with the EU to get behind her proposals.
Currency traders caution that investors now want to see concrete progress towards a deal rather than headlines before pushing sterling higher.
"Sterling has been pushed around by every bit of Brexit news. My sense is that ahead of the Salzburg (EU leaders') meeting, I wouldn't be surprised to see more positive noises from the EU," said Dean Turner, economist at UBS Wealth Management.
"The key thing to watch is that, if we get a November (EU) summit, which is rumored at the moment, that should be another positive signal for sterling." (Reuters)