Less than six months before Brexit, negotiators from both sides are trying to figure out how to keep the UK frontier with the Irish Republic free of border checks once Britain leaves the EU in March.

Some traders have been unwinding short positions on sterling, seeing potential for a breakthrough at Wednesday's EU summit in Brussels. But no agreement is in sight.

Still, the pound jumped on Tuesday after data showed that British workers' basic wages rose at their fastest pace in nearly a decade over the summer months.

The currency rose 0.4 percent to $1.3210 against the dollar. It gained 0.3 percent to 87.75 pence against the euro.

"The increased likelihood of the deal not being reached during the upcoming EU Summit limits the positive spill-over from solid UK data into GBP," said Petr Krpata, an currency strategist at ING.

It is not clear what EU leaders will be able to agree on at a dinner on Wednesday where UK Prime Minister May will give her view of the Brexit talks before they discuss among themselves how to proceed.

Even if the Irish border issue is resolved, investors fear it could signal the start of another, potentially tougher battle for May with her own lawmakers who want a cleaner break from Europe.

That is reflected in the latest positioning data, which show that traders have become more cautious about sterling after a recent unwinding of short positions.