NEW YORK — The pound rallied Tuesday to 5-month peaks amid optimism over a breakthrough in Brexit talks while Wall Street stocks rebounded following an upbeat start to earnings season.
Sterling got an early boost from the European Union's top Brexit negotiator flagging the possibility of reaching a divorce agreement this week, reviving hopes that Britain might yet avoid crashing out of the bloc without a deal.
With the exit deadline coming up on October 31, Michel Barnier's comments rekindled hopes that a compromise might be taking shape.
The British currency then got another shot in the arm when reports suggested that negotiators in Brussels were getting close to a deal.
It hit $1.28 in the late London afternoon, a level last seen in May, and also rose strongly against the euro.
Sterling jumped "as reports said UK and EU negotiators are closing in on a draft Brexit deal," said Neil Wilson, Chief Market Strategist at Markets.com.
'WHIRLWIND OF DIPLOMACY'
Barnier told reporters: "This work has been intense all along the weekend and yesterday because even if the agreement will be difficult -- more and more difficult to be frank -- it's still possible this week."
Even before he spoke, Britain's Daily Telegraph said a divorce agreement was forming, with EU and British negotiators hailing a positive day of talks on the Northern Ireland issue.
The paper quoted unnamed sources as saying there was "cautious optimism", while the BBC said the EU was considering holding an emergency summit to push through a possible deal as there was not enough time to get anything done before a summit set for this week.
The pound had come under pressure on Monday after European officials played down the chances of an agreement that had been aired by British Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar last week.
David Kelly at JP Morgan Asset Management said the Johnson-Varadkar talks had sparked a "whirlwind of diplomacy between the British government and the Europeans to try to come up with an agreement this week".
Analysts were quick, however, to put reports into perspective and warned investors against getting ahead of themselves.
"These kind of reports expose just how vulnerable sterling is to headline risk," cautioned Wilson. "At present these are unconfirmed reports and need to be verified."
In equity trading meanwhile Wall Street enjoyed an upbeat session, with major indices climbing around one percent following a round of mostly good earnings from JPMorgan Chase, Johnson & Johnson and others.
Eurozone stock markets also powered ahead, gaining more than one percent by the close, while London ended steady as the strong pound weighed on stock prices.
Meanwhile the IMF added to global worries about growth, saying Tuesday that the world economy is slowing to its weakest pace since the global financial crisis, amid continuing trade conflicts that have undercut business confidence and investment.
KEY FIGURES AROUND 5 A.M. THURSDAY
Pound/dollar: UP at $1.2781 from $1.2608 at 2100 GMT
Euro/pound: DOWN at 86.29 pence from 87.46 pence
Euro/dollar: UP at $1.1030 from $1.1027
Dollar/yen: UP at 108.84 yen from 108.40 yen
New York - Dow: UP 0.9 percent at 27,024.80 (close)
New York - S&P 500: UP 1.0 percent at 2,995.68 (close)
New York - Nasdaq: UP 1.2 percent at 8,148.71 (close)
London - FTSE 100: FLAT at 7,211.64 (close)
Paris - CAC 40: UP 1.1 percent at 5,702.05 (close)
Frankfurt - DAX 30: UP 1.2 percent at 12,629.79 (close)
EURO STOXX 50: UP 1.2 percent at 3,598.65 (close)
Tokyo - Nikkei 225: UP 1.9 percent at 22,207.21 (close)
Hong Kong - Hang Seng: DOWN 0.1 percent at 26,503.93 (close)
Shanghai - Composite: DOWN 0.6 percent at 2,991.05 (close)
Brent North Sea crude: DOWN 1.0 percent at $58.74 per barrel
West Texas Intermediate: DOWN 1.5 percent at $52.81 per barrel
© Agence France-Presse