The pound had its biggest two-day rally against the dollar since the Brexit vote as hopes rose that a deal could be struck before the deadline later this month.
Sterling climbed to the highest level in three months against the US currency, briefly hitting $1.27, amid mounting optimism in the City, after the EU’s chief negotiator, Michel Barnier, said talks could progress to the next phase.
The pound has risen four cents against the dollar since Thursday, when Boris Johnson and the Irish taoiseach, Leo Varadkar, agreed there was a “pathway to a possible Brexit deal”. That is the sharpest two-day rise in the pound since the EU referendum more than three years ago.
While several pitfalls remain, the pound also hit a near five-month high against the euro of €1.1465.
Oliver Harvey, an analyst at Deutsche Bank, said: “We cannot recall a time during the Brexit process of the last year at which the Irish government raised expectations to this extent.”
The surge in the pound on Friday pushed it back above $1.26 for the first time since Boris Johnson became the leader of the Conservative party.
Dean Turner, an economist at the Swiss bank UBS, said a Brexit extension and general election was still probably the most likely outcome. He said the pound would trade between $1.25-$1.29 under such a scenario but could soar to $1.35 if an eleventh-hour deal was struck, or tumble should talk break down.