LONDON: Sterling rallied for a second consecutive day on Tuesday as a weaker dollar fuelled appetite for riskier currencies while overnight comments from the European Union's chief negotiator that a Brexit deal was possible within weeks boosted sentiment.

For the second time in less than a week, Michel Barnier has signalled his desire to push ahead with Brexit negotiations, less than seven months before the United Kingdom is slated to leave the European Union on March 29, 2019.

"Recent comments from the UK and the European side have been remarkably positive for the British currency but these negotiations are by no means a straightforward affair and markets should be prepared for more volatility," said Morten Helt, a currency strategist at Danske Bank.

In early London trading, sterling rose 0.4 percent to a five-week high of $1.3072 against the dollar. Against the euro, it was broadly flat at 89.02 pence.

Hedge funds are broadly negative on the outlook for the British currency, according to latest positioning data which shows a net $5.5 billion outstanding short position.

But recent comments from policymakers have prompted investors to reduce some of their short positions.

On Monday, diplomats and officials said EU leaders were likely to hold a special Brexit summit in mid-November when they hope to be able to sign off on a divorce deal with Britain.

That has helped sterling rally nearly 2.5 percent from Wednesday's lows below $1.28 and tighten five-year credit default swaps by more than a basis point from a near 1-1/2 year high hit earlier this month.

Growing expectations of a deal are also eroding the safe-haven appeal for government debt with yields on ten-year British government bonds rising to a one-month high while German yields are also ticking higher.