German Chancellor Angela Merkel's comments on Thursday that a solution to the Irish border question post-Brexit could be found before Oct. 31, the deadline for Britain to leave the EU, triggered a sharp rally in the pound.

But many analysts said the comments reflected market positioning rather than any confidence Britain and the EU would renegotiate their agreement to avoid a no-deal Brexit.

"The market is very short and that is naturally going to make the market very sensitive to any news (that makes them think)...have we got this wrong?," said Jane Foley, a strategist at Rabobank.

"I've not read an awful lot into these moves," she said, adding that thin summer liquidity had exacerbated this week's volatility.

Sterling fell 0.5% to $1.2197 on Friday, retreating from the 3-week high hit on Thursday.

Versus euro the pound was down 0.4% on the day at 90.770 pence.