Positive soundings from the European Union on Brexit talks helped nudge Britain’s pound above $1.35 against the dollar on Wednesday.
The EU’s chief executive said on Wednesday she could not say if there would be a trade deal with Britain but there had been progress and the next few days would be critical.
Ursula von der Leyen said discussions about access to British fishing waters for EU vessels were “still very difficult” but negotiators had moved forward on the other most contentious element - guarantees of fair competition for companies.
Upbeat mood music around a possible Brexit deal before the year-end has helped the pound strengthen over 2% against the dollar this week. However, caution still shows in elevated implied volatility gauges which imply traders buying protection against price swings in the currency.
Tempering some of the optimism were comments from a British official, who said both sides had made some progress in the trade talks, but are still “very far apart in key areas”.
By 0900 GMT, sterling was up 0.3% at $1.3507 against the dollar. It rose above the $1.35 mark shortly after von der Leyen’s comments.
Against a broadly stronger euro however, it was down 0.2% at 90.34 pence.
On Tuesday, tweets from a BBC political reporter stating that Conservative party members think Britain is heading towards a deal with the EU supported the pound.
“Sterling remains beholden to the latest tweets – the most recent seemingly pointing towards a greater chance of a deal,” said ING strategists in a note to clients.
“Thin December markets and some big technical levels in cable at $1.35/40 warn of strong gains to $1.37 on any concrete signs of progress.”
Mikael Milhøj, senior analyst at Danske Bank said the pound would remain volatile in the near-term until further clarification on the talks is received.
Reporting by Ritvik Carvalho; Editing by Giles Elgood