LONDON - The pound briefly crossed $1.34 for the first time in three months on Tuesday, as market participants remained optimistic about the chances of a Brexit deal being reached, despite a lack of tangible progress in negotiations.

The UK left the European Union in January and is currently in a status quo transition period that will end on Dec. 31. Both sides are currently in trade talks to reach an agreement on the UK's future relationship with the bloc.

Michael Gove, a senior British minister, said on Tuesday that the talks were still stuck on the issues of fishing, governance rules and dispute resolution because the EU is asking too much.

He also said there was still a chance of a no-deal Brexit. 

The Irish prime minister said he was hopeful that a deal could be reached this week. But he had also expressed hope at the beginning of last week that the outline of a deal would be agreed within days. 

The pound rose in early London trading, pushed up above $1.34 by a weaker dollar, then erasing gains to trade flat on the day at $1.3326 at 1158 GMT.

Versus a stronger euro, it was down around 0.3% on the day at 89.82 pence .

"The waiting game for GBP continues, but we can expect more days of contradicting headlines driving intraday oscillations in GBP," wrote ING strategists, in a note to clients.

"As time goes on, we should see the size of such swings increase as markets attribute a bigger weight to any remarks by both parties' officials," they said.

PMI data showed British factories grew at their fastest pace in almost three years last month as they stockpiled raw materials and rushed to finish new work before new post-Brexit customs rules come into force on Jan. 1. 

CMC Markets' chief market strategist Michael Hewson said he expects the pound to continue strengthening to reach $1.35 by the year-end, helped by a weakening dollar.

"Everyone’s been so negative about the pound that I think there’s scope for it to go quite a bit higher from where we are at the moment, both against the dollar and against the euro," he said.

"The pound tends to do well when stock markets do well," he said, describing Brexit as the final roadblock for sterling, after which it could strengthen to $1.40 in 2021.

Speculators' have had a net short position on the pound versus the dollar since September, according to weekly CFTC futures data.

Euro-sterling volatility gauges with a one-month maturity rose to a six-day high, suggesting that investors anticipate increased price swings until the transition period ends.

(Reporting by Elizabeth Howcroft; Editing by Susan Fenton and Bernadette Baum) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))