Sterling jetted to an almost three-month high in trade-weighted terms on Thursday, adding to its biggest monthly gains against the euro since 2009 after Britain's Brexit minister said it would consider paying into the EU budget for market access.
The pound recovered more than a cent from an initial dip after data showed manufacturing growth unexpectedly cooling, as focus switched to the comments from Brexit chief David Davis.
Asked by a lawmaker if the government would consider making a contribution in any shape or form for access to the EU's single market, Davis said: "The major criterion here is that we get the best possible access for goods and services to the European market and if that is included in what he's talking about then of course we would consider it."
The pound, which has also enjoyed its best month against the dollar since March, has been helped by hints from Prime Minister Theresa May that she could be open to some form of transitional agreement with the EU that might ease the disruption of departing from the trading bloc.
"These headlines suggesting Britain may be able to access the single market are generating substantial sterling demand from traders and investors looking to reduce their short positions and unwind hedges," said Neil Jones, head of FX hedge fund sales at Mizuho.
Investors have been steadily reducing record short positions on the currency put on after the Brexit vote in June.
Sterling, which fell below $1.20 in a flash crash at the start of October, rose to a three-week high of $1.2650 after Davis' comments.