The pound briefly crossed $1.34 for the first time in three months, as market participants remained optimistic about the chances of a Brexit deal being reached, despite a lack of tangible progress in negotiations.
The pound rose in early London trading, pushed above $1.34 by a weaker dollar.
It then erased some gains later in the day.
Versus a stronger euro, it was down around 0.6% on the day at 90.07 pence - a 22-day high.
"The waiting game for GBP continues, but we can expect more days of contradicting headlines driving intraday oscillations in GBP," wrote ING strategists, in a note to clients.
"As time goes on, we should see the size of such swings increase as markets attribute a bigger weight to any remarks by both parties' officials," they said.
With just weeks to go before Britain's transition period of informal European Union membership ends, the two sides are struggling reach an agreement on their future relationship.
British minister Michael Gove said that talks were still stuck on the issues of fishing, governance rules and dispute resolution because the EU is asking too much, and that there was still a chance of a no-deal Brexit.
Tánaiste Leo Varadkar said he was hopeful that a free-trade agreement would be concluded in the next couple of weeks.
PMI data meanwhile showed British factories grew at theirfastest pace in almost three years last month as they stockpiled raw materials and rushed to finish new work before newpost-Brexit customs rules come into force in the new year.
CMC Markets' chief market strategist Michael Hewson said he expects the pound to continue strengthening to reach $1.35 by the year-end, helped by a weakening dollar.
"Everyone's been so negative about the pound that I think there's scope for it to go quite a bit higher from where we areat the moment, both against the dollar and against the euro.
"The pound tends to do well when stock markets do well," he said, describing Brexit as the final roadblock for sterling, after which it could strengthen to $1.40 in 2021.