LONDON: Sterling jumped to a three-week high on Tuesday on media reports that Prime Minister Theresa May will propose formally ruling out a no-deal Brexit.

Britain's crisis over leaving the EU, scheduled to take place on March 29, is going down to the wire.

With May struggling to get the changes she says she needs from the bloc to get her deal through a divided parliament, the risks she will be forced to delay Brexit are rising.

Expectations that Britain will be able to avoid crashing out of the European Union without a deal are buoying the pound, which last week bounced 1.3 percent.

On Tuesday the pound rallied nearly half a percent against the euro to a one-month high at 86.31 pence. It  also gained 0.4 percent against the dollar at $1.3160.

"Will these developments be sufficient to lift sterling to new highs? In my mind that would only be justified if a hard Brexit on 29th March could be excluded with some certainty,"  said Esther Reichelt, an FX strategist at Commerzbank in Frankfurt.

The immediate focus for traders is Wednesday when parliament votes on Brexit amendments and could seek to exert further control over Brexit.

Opposition Labour Party lawmaker Yvette Cooper's amendment seeks to prevent a no-deal Brexit and may be passed as three government ministers have added their support.

The optimism in the spot markets has yet to ripple over to the derivative markets yet with one-month implied volatility gauges on the pound, a market indicator for future expected swings, edging lower but within striking distance of a six-week high.

Risk reversals painted a slightly bullish picture with one-month gauges creeping higher in overnight trading.

However, market analysts say a short delay on Brexit negotiations is priced into the market and further gains for the pound would be difficult.

A large buildup of options between $1.34 to $1.35 levels indicate that investors are not convinced the rally will last.