LONDON: The British pound recovered on Tuesday on rising hopes of a breakthrough in Brexit negotiations, after earlier drifting lower on the back of a stronger dollar and as investors booked profits following the recent rally.

The British pound stabilised around $1.31 after earlier falling as much as 0.4 percent to $1.3034, nearing a one-month low hit last week.

Against the euro, the British currency also reversed earlier losses in later trading and rose 0.2 percent to 87.635 pence.

"The pound can definitely move higher from current levels but the markets are waiting for news on a substantial breakthrough in Brexit negotiations and until that materializes, we are trapped in a range," said Viraj Patel, an FX strategist at ING in London.

European Union negotiators said on Friday an agreement with Britain was "very close" and European Commission President Jean-Claude Juncker said on Saturday a deal would be reached in November, if not this month.

While hedge funds have bought the pound in recent days, overall short positions on the currency are at their highest levels in 16 months, according to futures data.

Many investors have preferred to sit on the sidelines rather than try to profit amid the political unpredictability and the currency's sharp price swings.

Mike Amey, head of sterling portfolios at fund management giant PIMCO, told Reuters on Monday that he held a moderately long position on sterling versus the euro, predicting a gradual rise over the next 12-18 months, because the market was "too pessimistic" about prospects for a disruptive Brexit.

Sterling has done well against the euro in recent weeks, partly as concerns about a row between Brussels and Rome over Italy's proposed budget deficit targets have added to the euro's woes in recent sessions.