LONDON: Sterling rose from a two-week low against the dollar on Thursday and also strengthened versus the euro, helped by tentative signs that a deal will be reached at a summit where Britain is seeking more favourable terms for its EU membership.
Prime Minister David Cameron said on Thursday that hard work and goodwill should help him to clinch a deal at the summit, described by leaders of the 28-nation bloc as the best chance of preventing Britain leaving.
Ahead of the talks, the latest draft agreement, sent to EU leaders overnight and seen by Reuters, offered several ways of overcoming differences on the most contentious areas of Cameron's renegotiation - migration curbs and financial safeguards - but much was still open for debate.
Earlier on Thursday, European Commission President Jean-Claude Juncker said he was "quite confident" that European leaders would reach a deal with Britain over its future EU memberhip.
By 1630 GMT sterling was up 0.4 percent at around $1.4350 , having fallen to as low as $1.4235 on Wednesday, its weakest level since Feb. 1.
Against the euro, it was half a percent higher at 77.40 pence. Saxo Bank's head of currency strategy, John Hardy, said Juncker's comments had been a key driver of sterling strength on Thursday.
"The key test for (sterling) will be whether ... sentiment improves on the back of an official EU announcement tomorrow that allows Cameron to return to the UK to hold a June referendum," he said. "Risk appetite is clearly an important wildcard for sterling as well."
Sterling tends to move in sync with riskier assets because of Britain's large current account deficit and relatively high interest rates compared with other developed economies.
Cameron is keen to end the week in Brussels with a deal that he can call a victory so he can then start campaigning to keep Britain in the EU before a referendum widely expected to be held in late June.
Analysts expect sterling to be volatile in the run-up to the vote, say sterling could fall sharply if Britons opt to leave Europe. Goldman Sachs has said sterling might fall as much as 15 to 20 percent. Ratings agency Standard & Poor's has said Brexit could hurt the pound's role as a global reserve currency.
The cost of hedging against swings in sterling's value over the next week was trading near its highest since Britain's election last May, as investors braced for more volatility . "Irrespective of the twists and turns of the debate, uncertainty over the outcome is likely to weigh on UK markets for a good few months yet," global bond fund PIMCO said in a note.
It assigns a 40 percent possibility of a "Brexit".
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