Sterling rose for a second day on Tuesday as risk appetite improved and expectations of a Brexit deal grew, prompting investors to buy the pound after a selloff last week.
In early London trading, sterling rose a quarter of a percent to $1.3153 as traders covered some of their short positions.
"We are starting to see some movement from London and Brussels towards a Brexit deal and that is helping sentiment," said fund manager Constantin Bolz of wealth manager Portfolio Concepts.
With just over six months until Britain leaves the European Union, UK Prime Minister Theresa May has yet to reach a deal with Brussels on the terms of its departure. Her plan for future trade ties was rebuffed by the EU last week.
British Brexit Secretary Dominic Raab said on Monday that he was confident that Britain would make progress and eventually clinch a Brexit deal.
Investors have been hedging against more weakness in sterling should the negotiations with the EU collapse, although some say large short bets on the pound make it vulnerable to any positive headlines.
Broader improvement in risk appetite also boosted bets with core U.S. and German bond yields rising and the euro/Swiss franc cross rising by more than 0.3 percent.