Sterling extended the last week's dramatic rally today as investors pounced on a media report that Northern Ireland's largest political party had agreed to accept some European Union rules after Brexit.
The report in the Times newspaper, which was swiftly denied by the DUP, ncouraged the view that Britain and the EU can agree a deal to replace the backstop.
This is the main sticking point in negotiations between London and Brussels.
Talk of an alternative to the backstop, which Prime Minister Boris Johnson wants scrapped, comes as investors slash their short positions on the pound because of the receding risks of a no-deal Brexit.
Having hit a three-year low below $1.20 last week, sterling has soared since the British parliament voted to stop Johnson's government from taking Britain out of the European Union on October 31.
The British currency has now rallied more than 4% in just eight days, a significant reversal of fortunes from earlier this month when talk of a no-deal Brexit intensified.
The pound strengthened 1% today to as high as $1.2455 - a seven-week peak.
Against the euro, sterling added 0.7% to trade at 89.070 pence per euro.
Credit Suisse today became the first major bank to change its view on UK equities, pointing to the reduced chances of the country crashing out of the EU and saying that some equities look cheap compared with foreign counterparts.
While the prospect of a no-deal Brexit on October 31 has fallen sharply, Britain still faces months of uncertainty and the outcome is not clear.
Boris Johnson wants to call a general election but lawmakers have blocked his attempt to do so, saying they want to be sure he cannot push through a no-deal Brexit in the meantime.
One analyst said that his base case scenario is that the UK is still heading for an early election in late November or early December, and it needs a short extension to the departure date for leaving the EU to break the deadlock in parliament.
UK opposition parties have vowed to block a no-deal Brexit but are divided about how to deliver Britain's exit from the EU.