- Traders have been on edge as the Brexit deadline of Oct. 31 approaches and there's still no clear agreement for how the U.K. will leave the European Union.
- Sterling is down about 5% from a year ago.
- Technical negotiations are ongoing ahead of a EU summit on Thursday.
Sterling rose sharply against the dollar Tuesday after optimistic comments on Brexit from European negotiator Michel Barnier were backed up by reports that a draft legal text over the divorce was being drawn up.
"Our team(s) are working hard, and work has just started now today, this work has been intense over the weekend and yesterday, because even if the agreement will be difficult, more and more difficult, to be frank, it is still possible this week," Barnier told reporters in Luxembourg on Tuesday morning.
He added that "any agreement must work for everyone," saying it is "high time to turn good intentions into a legal text."
By the mid-afternoon, one report suggested that a draft deal was in the works according to two separate sources familiar with negotiations. On that report, sterling took a further leg up, hitting $1.275 at 3:40 p.m. London time.
The currency rose above its 200-day moving average for the first time since May, reaching a four-month high.
The value of U.K. listed bank stocks and housebuilders also rose sharply.
Traders have been on edge as the Brexit deadline of Oct. 31 approaches and there's still no clear agreement for how the U.K. will leave the European Union. Sterling is down about 2.5% against the dollar from a year ago. However, expectations of a Brexit deal moved the currency about 3% higher earlier this month.
U.K. Prime Minister Boris Johnson made fresh proposals earlier in early October to overcome differences over the controversial Irish backstop — an insurance policy that is meant to protect the EU's single market (an economic area with the same rules and standards) without imposing a hard border between the Republic of Ireland and Northern Ireland.
Last week, the U.K. and the EU seemingly drew closer when it came to their long-standing differences over the issue with Johnson agreeing that there could not be a customs border on the island of Ireland. As a result, teams from both sides entered the so-called "tunnel" discussions in Brussels, meaning only a restricted group of people has access to those talks.
Stef Block, the Dutch foreign affairs minister, said at his arrival in Luxembourg Tuesday that the U.K. has taken some steps, "but not enough to guarantee the integrity of the (EU) common market."
"We still have time to avoid a no deal and we should use this time," he said.
Some other European officials sounded a bit less optimistic about the prospects of a deal. "I am not quite sure if a deal is close," Michael Roth, the German minister for European affairs, said Tuesday.
The Finnish Prime Minister, Antti Rinne, said Monday that he doesn't believe there's enough time in "a practical or legal way" to find an agreement before an EU summit later this week.
European leaders are gathering in Brussels Thursday and Friday, where Johnson hopes to strike an agreement with his counterparts that will allow for an orderly exit from the EU.
According to the Irish broadcaster RTE, the U.K. will table fresh proposals on Tuesday morning aimed at breaking the latest Brexit deadlock.