In another highly volatile day of trading for UK assets, financial markets remained hostage to Brexit headlines as British Prime Minister Boris Johnson and EU negotiators raced against time to agree a withdrawal deal.
Sterling has surged some 5pc since late last week when London and Brussels restarted intense Brexit talks.But on Wednesday, sources in the bloc said the talks had hit a "standstill".
Disagreements centre on a future trade deal and the rejection by Northern Ireland's Democratic Unionist Party of customs solutions tentatively agreed by negotiators for the Irish border.
Sterling and stocks fell on the news before recovering some ground after a report stated that the EU's chief negotiator, Michel Barnier, had told commissioners he was optimistic of getting a deal done on Wednesday.
"It looks like a deal is being worked on but everyone who works with the EU knows that these deals happen at the last minute," said Kit Juckes, head of currency strategy at Societe Generale in London."It seems more likely than not that we will need an extension."At 1005 GMT, sterling was down 0.3pc at $1.2731, off session lows but also below a five-month high of $1.28 hit on Tuesday.
Against the euro, the pound was also 0.3pc weaker on the day at 86.59 pence -- also off five-month highs.
Sterling trading volumes have surged in recent days. On Tuesday investors bought and sold more pounds than on any single day since November 2018, according to Refinitiv data.
British and EU officials resumed talks on Wednesday, a few hours after late-night negotiations wound up, but it was far from clear they would reach an agreement before the summit on Thursday.
Brexit minister Steve Barclay said on Wednesday he would not consider accepting a delay to Britain's EU exit beyond Oct. 31, even if it was only used to tie up the necessary legal requirements of an agreement.
London-listed companies that make their cash at home, from housebuilders to banks, on Wednesday reversed some of the ground gained since last week.
These domestically focused stocks, some of the world's most unloved shares in recent years, have seen their fortunes transform since Friday - JPMorgan's domestic basket has outperformed London-listed exporter peers and the blue-chip FTSE 100.
"There is a sense that we are moving towards a deal and the market is covering its shorts and justifiably so," said Neil Mellor, senior currency analyst at BNY Mellon, referring to investor bets on sterling weakness.
"But I would be cautious in chasing sterling higher, especially against the euro."
Trading in sterling options suggested high volatility in the currency was likely one way or another.
British government bonds benefited from the renewed uncertainty, with 10-year yields down 3 basis points at 0.66pc.With the spotlight on Brexit, September inflation data had little market impact.
Britain's inflation rate failed to rise as expected last month as petrol prices fell at the fastest rate in more than three years, a boost to consumers ahead of Brexit.