The pound rose above $1.32 on Tuesday on stronger-than-expected labour data, but investors said doubts about a European Union summit yielding much progress on Brexit would limit the currency's advance. Negotiations are deadlocked over the status of the border between Northern Ireland and EU-member Ireland after Britain leaves the bloc in March.
Some traders have been unwinding short positions on sterling, seeing potential for a breakthrough at Wednesday's summit. But no agreement is in sight.
Still, the pound jumped on Tuesday after data showed that British workers' wages rose at their fastest pace in nearly a decade over the summer months.
It rose 0.4 percent to $1.3235, and 0.3 percent to 87.75 pence against the euro.
"The increased likelihood of the (Brexit) deal not being reached during the summit limits the positive spillover from solid UK data into GBP," said Petr Krpata, an currency strategist at ING.
It is not clear what EU leaders will be able to agree on Wednesday, when UK Prime Minister Theresa May will give her view of the Brexit talks.
Even if the Irish border issue is resolved, investors fear it could signal the start of another, potentially tougher battle for May with her own lawmakers, many of whom want a clean break from Europe.
Latest positioning data shows that traders have become more cautious about sterling after a recent unwinding of short positions.
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