Sterling jumped above $1.28 on Wednesday after a reporter for Irish broadcaster RTE, citing European Union sources, said the main stumbling block to a Brexit deal had been removed.
The pound, down before the report, surged as much as 0.4% to $1.2840, a new five-month high. Against the euro sterling rose to 85.985 pence.
British government bond futures gave up their gains and UK domestically-exposed stocks cut their losses after the RTE report.
According to the reporter, the Northern Irish Democratic Unionist Party, which props up the British Conservative Party in the UK parliament, had accepted the latest proposals for a Brexit deal between London and Brussels.
The positive news sparked selling in safe-haven government bond markets, with Germany's 10-year bond yield rising to its highest in around 2-1/2 months a -0.397%.
British 10-year government bond yields were broadly flat on the day at 0.69% after prices fell back.
British and EU officials were to resume talks on Wednesday, a few hours after late-night negotiations wound up, but it was far from clear they would reach an agreement before the summit on Thursday.
A report on Tuesday negotiators were closing in on a draft Brexit deal sparked a surge by the pound and raised hope across world markets that a significant source of uncertainty would be removed. But the pound weakened on Wednesday as note of scepticism appeared to return.
"There is a sense that we are moving towards a deal and the market is covering its shorts and justifiably so," said Neil Mellor, senior currency analyst at BNY Mellon, referring to investor bets on sterling weakness. "But I would be cautious in chasing sterling higher, especially against the euro."
Trading in sterling options suggested high volatility in the currency was likely one way or another.
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