The pound gained as much as 0.6 percent up to $1.2959 before falling back to $1.2914, up 0.2 percent on the day by 1200 GMT. It had been broadly trading flat for most of the London session earlier. With six weeks to go before Britain is slated to leave the European Union, markets have become more jittery on any Brexit- related news and investors are wary of taking big bets before a firm resolution on the terms of Brexit is in sight.
As a result, turnover in the pound has declined compared to its rivals, with hedge funds and day traders trying to move the market by trading technical levels and Brexit headlines. Against the euro, the pound gained 0.25 percent to 87.59 pence.
Sterling also received a boost after the UK's chief Brexit negotiator was overheard saying in a Brussels bar that lawmakers face a stark choice between Prime Minister Theresa May's Brexit deal or a long extension to the March 29 deadline for leaving the bloc. Justin Onuekwusi, a fund manager at Legal and General Investment Management, said that while chances of a no-deal Brexit had probably increased slightly in recent weeks because of a stubborn parliamentary deadlock over the terms, it was clear neither lawmakers nor the EU favoured that outcome.
"You probably have to be at the edge of the cliff looking over before a deal is done," Onuekwusi said. He added that Robbins' comments appeared to imply that May could be leaning towards delaying the March 29 deadline, an option she has long rejected. "The options now seem to be the Theresa May deal or a delay."
That helped offset some of the gloom from inflation data showing price growth dipped below the Bank of England's target in January. Market-implied expectations of a quarter percentage point rate hike by the Bank of England have shrunk to 33 percent before the end of the year compared to nearly half last month.
Despite jittery cash markets, currency derivative markets were somewhat relaxed on the near term prospects for the pound. Implied volatility on the pound or expected swings in the British currency has fallen to more than a three-month low of nearly 10 vol compared to 14 vol in early-December.
Positioning data also indicated some degree of optimism on the currency. One-month risk reversals - an option market gauge of demand for puts versus calls on a currency - showed bias towards more sterling upside versus the dollar, reversing some of the pessimism seen in recent weeks.
(Reporting by Saikat Chatterjee and Sujata Rao Editing by Mark Heinrich)