The pound hit a two-week high on Wednesday as investors sensed in comments by Prime Minister Theresa May signs of progress in Brexit talks between the British government and the main opposition party. Sterling neared $1.31 after May said her plan to negotiate a customs arrangement with the EU was similar to that of the Labour Party and called for an end to uncertainty.
The pound was one of the only major currencies to move on Wednesday with markets in Asia and in much of Europe closed for holidays, keeping trade subdued. The British currency has stuck within a range of $1.28-1.30 since Britain pushed its scheduled departure from the European Union back from March until Oct. 31.
It remains unclear when, how or even if Brexit will happen.
British newspapers reported on Tuesday that May wants Brexit talks with Labour, aimed at breaking an impasse in parliament over the terms of departure from the EU, to conclude by the middle of next week and that buoyed sterling.
The next turning point for the currency could be a Bank of England policy meeting on Thursday though markets do not expect the BOE to raise interest rates until early 2020 when there could be more clarity on Brexit.
"A reduction in Brexit risks and tightening labour markets might prompt policy-makers to conclude that a rate hike might be a little closer than markets are currently expecting," said Shaun Osborne, an FX strategist at Scotiabank.
"A mildly hawkish hold should lift GBP," he added.
The pound rose 0.4 percent to $1.3085 and was flat against the euro at 85.95 pence.
With Japan out for a week of holidays, traders are worried that the absence of Tokyo, one of the world's top five currency trading centres, might fuel some exaggerated moves in foreign exchange markets.
Overall volatility in the currency markets remained near five-year lows. Despite the pound's gains against the dollar, net positions by hedge funds in sterling slipped back into negative territory, according to the latest data.