Sterling rose to a six-month high versus the euro today amid optimism that a vaccine against Covid-19 would bolster the UK economy and shifting expectations for Brexit and negative interest rates.
Global markets surged this week after Pfizer said on Monday that its experimental Covid-19 vaccine was more than 90% effective.
The pound benefited as investors judged that a vaccine would be a particular boon to the UK, which has seen its economy ravaged by the coronavirus.
"Since Britain has been disproportionately hit by the virus, it will be disproportionately helped by a vaccine," wrote Marshall Gittler, head of investment research at BDSwiss Group.
The pound hit 88.61 pence against the euro today. The euro was down around 0.4% on the day agains the dollar.
Sterling was down 0.1% on the day at $1.3262 agains the dollar, but was still up around 0.8% since Monday.
Pound traders had feared that the economic fallout from a second nationwide lockdown, combined with the threat of Britain and the European Union failing to agree on a post-Brexit trade deal, could push the Bank of England to introduce negative rates in January.
But a possible vaccine could go some way to mitigate the risk of negative rates, said Kit Juckes, head of FX strategy at Societe Generale, who noted that the G10 currencies which are down on the week versus the dollar are those with negative rates.
Money markets are now pricing in negative interest rates in Britain by August 2021 compared with May last week.
The vaccine optimism appeared to outweigh lack of progress in Brexit negotiations.
Britain left the EU in January and both sides are negotiating to agree a trade deal for the end of the transition period on December 31.
Some analysts said that Democrat Joe Biden's victory in the US presidential elections supports a deal.
Biden stressed the importance of protecting Northern Ireland's peace deal in the Brexit process when he called UK Prime Minister Boris Johnson this week.
The EU-UK trade talks are set to continue past a mid-November deadline, according to sources on both sides.