Sterling surged today to a three-month high as investors rushed to price in the prospect of a last-minute Brexit deal between the European Union and Britain.

The pound has rallied more than 3% since yesterday, its biggest two-day gain since mid-June 2016, before the British public voted to leave the EU.

EU Brexit negotiator Michel Barnier said today he had had a "constructive" meeting with his British counterpart, Stephen Barclay. 

That followed a meeting yesterday between Taoiseach Leo Varadkar and British prime minister Boris Johnson, who released a joint statement saying they could see "a pathway to a possible deal".

The statement surprised many investors who believed chances of an agreement before October 31 were all but dead and another extension to the deadline the most likely outcome.  

The pound rose nearly 2% to a three-month high of $1.2685 in London trading.

Against the euro, the pound strengthened as much as 1.4% to 87.20 pence. 

Sounding a more cautious tone, top EU official Donald Tusk said "time is practically up" for Britain to reach a Brexit deal. That hurt the pound temporarily in a very volatile day for the currency.

One dealer in London attributed price swings to "algos" - or computer-generated trading algorithms - in a headline-driven market.

Hopes are that a meeting between British and EU negotiators will pave the way for a Brexit transition deal at an October 17-18 summit. 

But some remain sceptical that Johnson will succeed in getting the agreement past Britain's parliament.

Deutsche Bank's forex strategist George Saravelos said he was "turning more optimistic on Brexit" and no longer negative on the pound, while JPMorgan said yesterday's statement may have "changed everything".

The sterling rally undermined UK's export-heavy FTSE 100 but domestically focused UK retailers, banks and housebuilders benefited, rising 4%- 6%.  

Stocks in Dublin also rallied strongly today.