UPDATE 2-Pound hits 3-1/2 month high vs euro on fresh Brexit deal hopes

Sterling hit a new 3-1/2 month high versus the euro and added to gains against the dollar on Wednesday on optimism that Britain and the European Union can agree on a Brexit deal soon.

Britain's ITV News reported late on Tuesday that the two sides had made progress in negotiations over an Irish border backstop, a key hurdle in reaching a Brexit deal.

"We've been here before (with Brexit hopes) but this pound move might have a little further to run, especially against the Australian and New Zealand dollars," Chris Turner, head of foreign exchange strategy at ING, said in a note to clients.

The Times newspaper also reported that around 30 to 40 lawmakers from the opposition Labour Party would be prepared to back a Brexit deal that British Prime Minister Theresa May is trying to strike with the EU.

The British economy's summer surge turned out to be stronger than expected as warm weather spurred consumer spending and housebuilding, official data showed on Wednesday.

The data is likely to reassure the Bank of England about the economy's momentum as Brexit approaches in March but it did not move the pound.

At 0900 GMT sterling was up 0.1 per cent versus the euro at 87.43 pence per euro.

Against the dollar, sterling firmed 0.3 per cent to as high as $1.3186, its strongest level since Sept. 26, before easing back to trade flat at $1.3142.  

(With inputs from agencies.)