The British pound was up nearly 0.6 percent against the greenback at around 12:30 p.m. London time, trading at $1.3004, and rose by a similar margin against the euro. The market reaction was trigged by the publication of remarks made by Michel Barnier to the U.K. Parliament last Monday. Barnier suggested the EU is open to other solutions to overcome the current Irish border dispute, according to the comments on the U.K. government website, and not just what the EU proposed itself.
"We are open to discussing other backstops, so we can discuss this text, we can make changes to it," Barnier said.
Currency traders seemed to interpret these comments as a less-rigid stance by the EU over an issue that has proved difficult to solve for both sides of the negotiations. The EU proposed in March that Northern Ireland, which is part of the U.K., should continue following EU rules, even if that means being isolated from the British mainland.
The Irish border issue has perhaps been the biggest stumbling block, given that Northern Ireland and the Republic of Ireland do not want a hard border dividing them once the U.K. leaves the EU. The island of Ireland will effectively be both non-EU territory and EU territory after Brexit.
Regardless of his views on this issue, Barnier still didn't rule out the possibility of both sides not reaching a deal.
"If the outcome of these long negotiations were to be no deal, then measures would have to be taken on both sides, contingency plans in this area as in any other," he told U.K. lawmakers.
Market players have been concerned over a potential abrupt break-up between the EU and the U.K., given that time is running short before the latter officially departs from the bloc in 2019. Comments from high-ranking officials, including the governor of the Bank of England, Mark Carney, have led many to believe they will not bridge their differences.
"Sterling is currently pricing in more downside risk than upside risk when it comes to Brexit. A relief rally in sterling and other U.K. oriented assets is likely if the U.K. and the EU strike a trade deal on trade that avoids a no-deal hard Brexit," Kallum Pickering, a senior U.K. economist at Berenberg, told CNBC via email.
He suggested that sterling could jump to $1.54 by mid-2019 in such a scenario. Viraj Patel, a foreign exchange and global macro strategist at ING, said on Twitter that if both sides reach an agreement over Brexit in the coming weeks, sterling could hit $1.32.