Sterling steadied just below a six-week high today after its recent rebound, as investors assessed the chances Prime Minister Boris Johnson can strike a Brexit deal with the European Union.
Boris Johnson said yesterday he would not request an extension to Brexit beyond the October 31 deadline.
Hours earlier, a law had come into force demanding that he delay Brexit until 2020 unless he can reach a transition agreement with the EU.
Johnson's team wants Brussels to tweak an existing withdrawal agreement so parliament can approve it and Britain won't crash out of the EU without a deal on October 31.
Investors, calculating the risk of no-deal Brexit is receding, have pushed sterling from under $1.20, the three-year low it reached early last week, to as high as $1.2385 on Monday.
Sterling rose today to $1.232, while it also gained slightly against the euro to stand at 89.3 pence.
The pound has also been supported this week by better-than-expected economic data, which confounded earlier expectations that the UK would fall into recession this quarter.
ING analysts said the pound had rebounded as traders betting against it were forced to close their positions.
"With the short squeeze in GBP under way, we have observed a general reduction in various GBP risk premia measures over the past week," they wrote.
Volatility gauges suggest investors think the next "stress period" for the pound will come in late November and early December, the ING analysts said.
"With the UK Parliament suspended for the next five weeks, sterling may enjoy some more calm today / this week, but we expect pressure on sterling to return once the early elections are announced," they added.