Sterling jumped on Wednesday afternoon following reports that Britain and Germany are preparing to drop key Brexit demands, paving the way to a deal in the coming months.
Berlin is ready to accept a less detailed agreement on Britain's future trade ties with the EU in an effort to get a Brexit deal done, according to Bloomberg.
The pound, which has taken a Brexit beating over the past few weeks, spiked against the dollar and was up almost 1% at 1.29 on the day.
Versus the euro, the British currency gained 0.5% to hit 1.11.
Neil Wilson, chief market analyst at Markets.com, said: "The reports indicate that both sides are prepared to forego ironing out some details on the future relationship now, in order to get a deal done.
"A couple of health warnings on this: first, Germany does not - despite its clear dominance of the bloc economically - actually speak for the EU position. Michel Barnier may well have something to say about this report. As might Theresa May.
"Second, we've heard these kinds of rumours lift the pound before and it should be treated with caution. There is a strong chance that this rally could run out of steam and retrace in fairly short order."
The pound has taken a severe hammering in recent weeks following comments from a number of MPs and key figures.
British trade Secretary Liam Fox has talked up the chances of the UK leaving the EU without an agreement, having changed his mind since last year when he claimed a deal would be the "easiest in human history".
Bank of England governor Mark Carney has also warned about the increased likelihood of the UK crashing out without a deal.
Theresa May's Chequers Brexit blueprint has been roundly rubbished, most recently by her own MPs.