Britain said the door was still open if the European Union wanted to make some small concessions, but that unless the bloc budged there would be a no-deal exit in 10 weeks.
Michel Barnier and David Frost, the lead EU and British negotiators, were discussing continuing trade talks over the phone on Monday, after British Prime Minister Boris Johnson said there was no point in continuing talks.
"Weekend developments and headlines are spurring demand for the pound this morning as there is a growing perception the red lines may be closing in, raising the chances of a deal," said Neil Jones, head of FX sales to financial institutions at Mizuho Bank.
Against a broadly weak U.S. dollar
But with only 11 weeks to go before the end of the transition period, Berenberg economists estimate the probability of a "hard Brexit" at as much as 50% with both sides taking steps to soften the blow on their respective economies.
"We thus have to watch carefully the risk that neither side blinks and, in the end, the two sides finally part ways without a deal," they said in a note.
Latest positioning data for the week ending Oct. 13 showed investors have been steadily reducing their holdings in the British pound.
In derivative markets, one-month implied volatility gauges for the pound firmed above 11%, the highest levels in more than a month, pointing to rising uncertainty.
(Reporting by Saikat Chatterjee; Editing by Christopher Cushing, Andrew Cawthorne and Alex Richardson)
By Saikat Chatterjee
