Sterling touched $1.34 against the dollar today, extending gains of more than 1%, after Britain and the European Union extended discussions on a post-Brexit trade deal beyond Sunday's deadline. 

British Prime Minister Boris Johnson and Ursula von der Leyen, the president of the European Commission, told negotiators to continue talks beyond Sunday to resolve an impasse on arrangements that would guarantee British access to the EU's single market.  

The EU's Brexit negotiator, Michel Barnier, said a new trade pact with Britain was still possible.

His comments came as negotiators sought to break deadlocks on access to UK fishing waters for EU vessels and corporate economic fair-play rules. 

British Business Secretary Alok Sharma told Sky News today that while Britain and the EU are still apart in the talks, Johnson does not want to walk away yet. 

The pound traded 1.4% higher to the dollar at $1.3405 today, while against the euro, it was 1% higher at 90.63 pence per euro. 

"The pound is obviously relieved that the trade talks will continue between the EU and the UK," said Jane Foley, head of FX strategy at Rabobank. 

"However, no tangible process has been confirmed over the weekend and the market is therefore likely to remain on tenter-hooks in the week ahead. Without confirmation that progress has been made, the pound's gains are likely to be capped," she added.

The odds of Britain agreeing a trade deal with the EU before the end of a transition period have risen to 57% today, up from 40% last week, according to punters betting on the Smarkets exchange.  

Chances of no deal had risen to as much as 61% on Friday from 19% in late November after leaders failed to break an impasse in talks, according to the betting exchange. 

Investors also appeared cautiously optimistic on the chances of a deal, particularly as the end of the Brexit transition period on December 31st draws closer. 

"It comes as no surprise that the EU and the UK have allowed another self-imposed deadline to pass. Although there is little sign at this stage that the main sticking points are any closer to being resolved, we expect progress to be made as the only real deadline, 31 December, approaches," said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note to clients. 

"In our view, a deal is still more likely than not, but with each day that passes, the risk of a no-deal outcome grows," he added. 

UBS added that the announcement of an agreement could push sterling to $1.35, while increasing uncertainty about a no-deal outcome could lead it to revisit September lows around $1.28.

ING's currency strategists said they expected a pound rally to materialise in the next two weeks, with a deal still being the most likely scenario.

Goldman Sachs economists said "significant sticking points" remained, but their base case is still a thin free trade agreement being reached before the end of the year, which would ensure continued free trade in goods but entail barriers for trade in services.

Economists at Citi said that even if a deal is agreed over the coming days, "persistent acrimony remains likely", which would weigh on the medium-term outlook.

A Canada-style deal with the EU is now the best possible outcome, the added.