LONDON: The pound on Monday hit a six-week high, helped by a weaker dollar and reports of progress on the Irish border question, an obstacle to Brexit diplomats will try to overcome this week at a European Union summit.
The United Kingdom is due to leave the EU on March 29 but no full exit agreement has been reached and some rebels in Prime Minister Theresa May's Conservative Party have threatened to vote down a deal if she clinches one.
But sterling has benefited recently from reports on behind-the-scenes efforts to work out how to manage the Irish border if Britain also leaves the single market and customs union.
A report published by The Times on Monday said EU chief negotiator Michel Barnier is working on a plan to minimise physical checks at the border between the two Irelands by tracking goods using barcodes on shipping containers.
The first of three summits on the terms of Brexit will be held this week, and EU leaders hope a deal can be struck by November. The talks could determine how orderly Britain's March 2019 withdrawal will be and what kind of economic impact it and its neighbours face.
"Sterling could out-perform this week if the EU decide to adopt a more flexible stance on Brexit at the EU summit," said Chris Turner, head of foreign exchange strategy at ING. The pound could rise to 88.50 pence against the euro, he said.
Sterling on Monday traded up 0.6 percent at $1.3157 , its highest since August. It was flat against the euro at 88.91 pence..
The pound has reversed nearly all its losses against the dollar in August, when fears of a no-deal Brexit surged and last week it gained 1.2 percent.
Other analysts expressed caution, though.
"The moderate recovery of sterling we saw over the past weeks is justified. But for all those who have to manage their sterling risks beyond the Brexit date, the problem of how to plan ahead persists, of course," said Ulrich Leuchtmann, a currency strategist at Commerzbank in Frankfurt.
Despite growing confidence Britain can land a Brexit deal, domestic political uncertainty remains high.
Recent signals from Brussels have buoyed hopes that the United Kingdom and the EU can agree a proper divorce arrangement, but the biggest obstacle to a compromise might be hard-line Brexiters in May's own party.
Britain's opposition Labour party will vote against May's Brexit plans, a senior Labour lawmaker told the Financial Times last week.
International Monetary Fund Managing Director Christine Lagarde said on Monday that failure to get a deal would make the economy shrink. The economy will grow around 1.5 percent this year.
"I very much hope and pray that there will be a deal between the European Union and the UK," she told reporters.