Sterling jumped to a six-week high on Monday after Michel Barnier signalled that a Brexit deal is within sight.
The pound was up nearly 1% versus the dollar at 1.302 and gained 0.4% against the euro to end the session on 1.122.
It came after the EU’s chief negotiator said a Brexit deal could be achieved within the next six to eight weeks.
“If one person can shift sterling at the moment it is Michel Barnier. The currency is desperate for any signs of good news from the EU’s chief negotiator, often making the most of some pretty tepid statements.
“Monday’s gains seem slightly more justified however, with Barnier saying that it was a ‘realistic’ possibility a deal could be reached by November. And though, of course, the content of any deal is the thing that really matters, at the moment the pound will take what it can get,” said Connor Campbell, financial analyst at SpreadEx.
The pound – which has taken a hammering in recent weeks as fears mount that Britain is set to crash out of the EU without a deal – was also spurred on by better-than-expected figures for the UK economy.
The Office for National Statistics (ONS) said the economy expanded 0.3% in July, while gross domestic product (GDP) rose 0.6% on a three-month basis, driven by construction and services.
The pound strengthening knocked the FTSE 100, which closed the session flat.
London’s top flight ended the day up 0.6 points, or 0.02%, at 7,279.3.
Primark owner Associated British Foods closed down 13p at 2,257p after the firm warned it will take a £20 million hit due to the stronger pound.
While its full-year outlook for the group is unchanged – with “progress” expected in adjusted operating profits and adjusted earnings per share – unfavourable exchange rates are expected to drag on results.
Also in the doldrums was Debenhams, which has enlisted the services of KPMG to help draft emergency plans to save the troubled retailer.
The department store is said to be considering a list of options including a company voluntary agreement (CVA), a controversial insolvency procedure used by struggling firms to shut under-performing shops.
The retailer’s stock sank 1.3p, or 10.7%, to end the day on 11.5p.
Meanwhile, Dignity shares crashed after rival Co-op fired the latest salvo in the sector’s price war.
Co-op Funeralcare said over the weekend it is reducing the cost of its “simple funeral” by £100 to £1,895, and by a further £200 for its 4.7 million members.
Charles Hall, analyst at Peel Hunt, believes that if Dignity tries to respond by itself lowering prices, it could wipe £1.5 million off its profits.
Shares ended down 55p at 977p.
In Europe, Germany’s DAX was up 0.22% while France’s CAC closed up 0.33%
A barrel of Brent Crude was trading at 77 US dollars, a rise of 0.6%.
The biggest risers on the FTSE 100 were London Stock Exchange Group up 82p at 4,726p, Royal Bank of Scotland up 4.3p at 249.3p, Morrisons up 4.25p at 266.15p and Experian up 30p at 1,920p.
The biggest fallers on the FTSE 100 were Melrose Industries down 9.9p at 216.3p, Fresnillo down 21.6p at 812.4p, Glencore down 5.2p at 290.75p and EasyJet down 21p at 1,419p.