Sterling was lifted on Thursday by hopes that Prime Minister Theresa May can secure changes to her Brexit deal from Brussels.
The British currency has swung wildly in recent sessions as May tries to persuade European Commission chief Jean-Claude Juncker to modify her withdrawal deal and then get the tweaked agreement through the British parliament.
If she fails, Britain could crash out of the world's biggest trading bloc on the March 29 exit date.
But the pound could leap higher if she gets a revised deal through parliament, as investors begin to see a path through Brexit that is less harmful to the economy.
Sterling rose 0.3% to a day's high at $1.3086 after British finance minister Philip Hammond said that talks with Brussels had been constructive and that lawmakers could vote on a revised deal as early as next week.
It then fell back when a British government source poured cold water on the prospect of an imminent Brexit deal. The source said it was unlikely Britain could secure changes from the EU before a parliamentary vote happens next week.
May will hold bilateral meetings with EU leaders at the weekend.
The pound was up 0.1% at $1.3035 by 1430 GMT.
The resignation of several lawmakers - angry at their leaders' handling of Brexit - from the ruling Conservative and the opposition Labour parties to sit as independents has encouraged some traders to believe that May will show more flexibility in getting a deal and avoiding a no-deal disorderly Brexit in March.
"I’m not yet ready to turn bullish on sterling, but if more people join the Independent Group, it would be like MPs mutinying against their captains in order to steer the ship away from the iceberg. That could be extremely positive for GBP," said Marshall Gittler, chief strategist at ACLS Global.
One-week sterling implied volatility - a measure of expected price swings in the pound - has risen, as traders get nervous about more possible parliamentary votes on the Brexit process that is scheduled for Feb. 27.
"We haven't had any concrete indication there is likely to be a resolution," said Sarah Hewin, chief Europe economist at Standard Chartered.
"We have seen in the past sterling has reacted quite positively to headlines that may not be very substantial so the problem we have is in differentiating between positive rhetoric and the way the situation is actually portrayed with the EU and the UK government."
Against the euro, sterling gained, rising 0.1% to 86.83 pence. (Reuters)