An EU diplomat said last week that "the mood music was a bit better" after Britain's Brexit supremo Michael Gove expressed confidence about securing a trade deal.
"If discussions this week lead to a break through in fisheries and level playing field then we could hopefully land an agreement by Oct. 15," Kenneth Broux, head of corporate FX at Societe Generale, said.
The Bank of England Deputy Governor Dave Ramsden's comments on Monday saying he thought the floor for the central bank's key interest rate was 0.1% could also have helped the pound, but his views were already known in the media, Broux said.
"We have a good starting week for risk assets, we've got some cautious optimism on Brexit and we've got month-end and quarter-end so we have to be very mindful of all these factors coming together," Broux said.
The Bank of England and the European Union's securities watchdog said on Monday they had agreed on the information-sharing arrangements needed for the bloc's banks to continue using clearing houses in London from January. urn:newsml:reuters.com:*:nL9N2ER02C
Sterling was trading hands by 1200 GMT at $1.2904 GBP=D3 , up 1.3% on the day. It also rose by 1% versus the euro to hit a 20-day high of 90.30 EURGBP=D3 .
Latest CFTC data showed that hedge fund held a small amount of sterling short positions in the week to Sept. 22 .
"There's hope that, no matter what, they will avoid the extremes and even if there is no deal, they will make sure that we don't get any disruptions in the market," said Athanasios Vamvakidis, global head of G10 FX strategy at BAML.
"Just a couple of weeks ago, everything was falling apart. There was the internal market bill and the chances for a deal had collapsed," said Vamvakidis.
"And since then it seems that the UK government ... have indicated that they will avoid violating the withdrawal agreement so this was one positive," he said.
The internal market bill had raised worries that Britain was on course to override the withdrawal agreement signed last year which protected the border between Ireland and Northern Ireland, an issue at the heart of last year's Brexit negotiations.
Still, Britain on Friday said there was still a lot of work to do in talks with the EU on a trade deal and called on the EU to translate a "more constructive attitude" into realistic policy positions.
Britain continues to struggle with a rise in coronavirus infections, recording 5,693 new cases on Sunday.
The British government is mulling tougher restrictions in England to tackle the swiftly accelerating second wave of the coronavirus outbreak.
The recession induced by the pandemic has market watchers questioning whether Britain will cut its interest rate below zero.
The Bank of England's investigation into whether negative rates might help the British economy through its current downturn has found "encouraging" evidence, policymaker Silvana Tenreyro said in an interview published late on Saturday. (Reporting by Olga Cotaga; Editing by Alison Williams) ((firstname.lastname@example.org;))