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.
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.
It also rose to its highest since Sept. 9 at 83.96 pence per euro and was also at its strongest against the Bank of England's trade-weighted broader measure for the currency at 78.3.
A number of major banks have called for the pound to fall to around $1.15 or lower in the first months of 2017 as Britain triggers so-called "Article 50" procedures that start a two-year countdown to its EU exit.
Adam Cole, global head of FX strategy at RBC, said underwhelming numbers on Thursday could mark the beginning of a more bearish turn in data on how the economy is coping with the uncertainty related to leaving the EU.
Thursday's Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) fell to 53.4 from 54.2 in October, undershooting expectations for a rise to 54.5 in a Reuters poll of economists.
"These are the first PMI releases post-referendum to be surveyed against the background of a rising exchange rate," said Cole.
"The fact that the PMI disappointed and export orders in particular disappointed is a warning that the manufacturing sector in particular might be less robust than it appears if you take away the prop of a falling currency."