LONDON: Sterling reached a one-week high back above $1.30 on Tuesday after media reports that the tone of Brexit talks between the British government and the main opposition party had improved.
The pound rose to as high as $1.3012, with broad dollar weakness, the breaking of a key resistance level of $1.2987, and some end-of month portfolio changes by asset managers all cited as possible reasons for the move alongside the Brexit-related optimism.
The pound had fallen to a two-and-a-half-month low last week as the dollar surged and worries mounted about a deadlock in talks over the terms of Britain's exit from the European Union.
But the Times newspaper reported on Tuesday that Prime Minister Theresa May's government has made substantive moves in Brexit talks with the opposition Labour party, citing unidentified Labour sources.
The EU hopes Britain's two biggest political parties will reach agreement on Brexit this week, possibly including membership in a customs union, the EU's chief Brexit negotiator said.
May agreed a withdrawal deal with the EU last year, but it was rejected three times by a deeply divided British parliament. That delayed the exit date, a postponement that has weighed on the pound as investors fret about prolonged political uncertainty.
The pound gained 0.6 percent to $1.3012 and 0.3 percent to 86.16 pence against the euro.
Sterling traded as low as $1.2851 last week as the dollar surged towards two-year highs, measured against a basket of currencies.
"May is still under pressure to pass her deal; however, we don't see a breakthrough anytime soon," Nordea analysts said in a note.
"Instead, we expect May to be ousted over the summer, leading to another extension beyond October 31. This postpones a BoE (Bank of England) hike and should weigh on GBP."
The Bank of England announces its interest rate decision on Thursday. Traders will search Governor Mark Carney's comments for signals that the central bank is ready to raise rates to tame inflationary pressures - although few analysts expect an increase before Britain's departure from the EU is clearer.