LONDON: The British pound gyrated Tuesday as rumours and uncertainty about the Brexit endgame played havoc with investor nerves.
Prime Minister Theresa May launched a new diplomatic push to avert a no-deal Brexit and secure a new delay to the date for leaving the bloc.
Sterling bobbed briefly above $1.31 in late morning foreign exchange deals, but then fell back against both the dollar and the euro.
"In a clear example of how headline driven the pound is at present, there's been a swift move higher and just as quick a drop back lower as the latest round of Brexit rumour and counter-rumour hit the news wires," said David Cheetham, an analyst with XTB.
He cited reports, later denied, that German Chancellor Angela Merkel was willing to grant a five-year time limit on the backstop which saw traders rush to buy the pound in anticipation of a breakthrough.
"However, the gains were fleeting and they were promptly handed back when it was confirmed the reports were untrue and we can expect more of this sort of thing in the coming days," Cheetham predicted.
In the event, both France and Germany said that they could agree to a Brexit delay.
German Chancellor Angela Merkel, according to a source from her party, sees an extension up to early 2020 as "possible", while an aide to French President Emmanuel Macron said a delay "within limits" was an option, but a year "seems too long".
Both statements helped lift sterling off the day's worst levels.
Belgium said Tuesday it is to host a mini-summit of the EU members most exposed to the dangers of a no-deal Brexit on Wednesday.
Also Tuesday, the IMF issued a stern warning, saying a "no-deal" Brexit would send the British economy into severe shock.
- 'Wild week' -
The pound is set for "another wild week" amid uncertainty over the shape of Brexit, said FXTM analyst Lukman Otunuga.
"When dealing with Brexit, one should always expect the unexpected and this will remain the mantra until more clarity is provided," he said.
European and US stock markets meanwhile dropped as traders detected cooler relations between the United States and China over trade than they had previously hoped for, with flaring trade tensions between the US and the European Union adding to worries.
President Donald Trump on Tuesday lashed out at the EU, vowing to slap tariffs on billions in EU imports in retaliation for subsidies to aviation giant Airbus.
Markets remain on tenterhooks on the eve of the European Central Bank's interest rate decision -- and publication of the US Federal Reserve's meeting minutes.
Earnings season also kicks off in earnest this week, with expectations low but observers hoping for some positive forward guidance.
- Key figures around 1545 GMT -
Pound/dollar: DOWN at $1.3039 from $1.3061 at 2100 GMT on Monday
Euro/pound: UP at 86.49 pence from 86.23 pence
Euro/dollar: UP at $1.1278 from $1.1263
Dollar/yen: DOWN at 111.11 yen from 111.48 yen
London - FTSE 100: DOWN 0.4 percent at 7,425.57 points (close)
Frankfurt - DAX 30: DOWN 0.9 percent at 11,850.57 (close)
Paris - CAC 40: DOWN 0.7 percent at 5,436.42 (close)
EURO STOXX 50: DOWN 0.6 percent at 3,417.22
New York - Dow: DOWN 0.6 percent at 26,175.24
Tokyo - Nikkei 225: UP 0.2 percent at 21,802.59 (close)
Hong Kong - Hang Seng: UP 0.3 percent at 30,157.49 (close)
Shanghai - Composite: DOWN 0.2 percent at 3,239.66 (close)
Oil - Brent Crude: DOWN 41 cents at $70.69 per barrel
Oil - West Texas Intermediate: DOWN 41 cents at $63.99