European Commission President Jean-Claude Juncker said Britain and the EU had agreed a new Brexit deal, and he recommended that the EU summit endorsed the agreement.
The pound jumped as high as $1.2988, a five-month high. Against the euro it rose sharply to 85.77 pence .
The euro was also buoyed by the news, gaining 0.5pc versus the dollar to $1.1125.
British and European stocks rose across the board, with the UK mid-cap index up more than 1.1pc. Germany's DAX rallied 0.5pc while Ireland's gained 0.3pc.
Euro zone government bond yields rose, while the 10-year British gilt yield was up 7 basis points, at 0.793pc, its highest since July.