LONDON: Sterling gained against the dollar on Thursday, rising towards a recent five-month peak, driven by a weakening dollar and rising hopes of a post-Brexit trade deal before a transition period ends this year. Sterling advanced 0.6% to $1.3125, its biggest daily rise since the end of July. It hit a March 2020 high of $1.3185 last week. So far in August, it has been broadly in line with its pre-pandemic levels.

Versus the euro, it was little changed, at 90.455 pence per euro. Even though dollar weakness boosted the British currency, investors remained cautious on the pound's outlook for the rest of the year, expecting it to recover only in 2021.

Irish Prime Minister Micheál Martin said on Thursday he believes there is a "landing zone" to reach a post-Brexit trade deal between the United Kingdom and the European Union. The dollar declined for a second straight day and held at a one-week low as gains in stocks and concerns over a deadlock over additional stimulus for the US economy.

Currency markets shrugged of weak data this week showing the British economy was among the worst-performing nations in the second quarter with analysts expecting some recovery in the coming months. Britain's economy shrank by a record 20.4% in the second quarter, substantially worse than the euro zone (12.1%) or United States (9.5%), data on Wednesday showed.

"In reality, most market participants had been pencilling in a decline in Q2 GDP of 'around' 20% for some time now so yesterday's release from the ONS didn't come as too much of a surprise even if the magnitude of the contraction dwarfs anything any of us have experienced before," RBC strategists said.