The British pound extended gains and climbed above $1.30 on Monday as hopes grew that British and European negotiators might be able to salvage post-Brexit trade talks.
Britain said the door was still open if the European Union wanted to make some small concessions, but that unless the bloc budged there would be a no-deal exit in 10 weeks.
EU and UK Brexit negotiators, Michel Barnier and David Frost, will discuss continuing trade talks over the phone around 1300 GMT on Monday after British Prime Minister Boris Johnson said there was no point in continuing talks.
“Weekend developments and headlines are spurring demand for the pound this morning as there is a growing perception the red lines may be closing in, raising the chances of a deal,” said Neil Jones, head of FX sales to financial institutions at Mizuho Bank.
Against a broadly steady U.S. dollar, the pound strengthened 0.6% higher at $1.3006. Against the euro, the pound gained 0.5% to 90.33 pence.
But with only 11 weeks to go before the end of the transition period, Berenberg economists estimate the probability of a hard Brexit at as much as 50% with both sides taking steps to soften the blow on their respective economies.
“We thus have to watch carefully the risk that neither side blinks and, in the end, the two sides finally part ways without a deal,” they said in a note.
Latest positioning data for the week ending Oct. 13 showed investors have been steadily reducing their holdings in the British pound.
In derivative markets, one-month implied volatility gauges for the pound firmed above 11%, the highest levels in more than a month, pointing to rising uncertainty.
Reporting by Saikat Chatterjee; Editing by Christopher Cushing and Andrew Cawthorne