The pound rallied yesterday after the European Union’s top Brexit negotiator flagged the possibility of a divorce agreement this week, reviving hopes that Britain might yet avoid crashing out of the bloc without a deal.

With the exit deadline on October 31, Michel Barnier’s comments rekindled hopes that a compromise might be taking shape.

Sterling surged 0.7 per cent against the dollar to $1.2698, close to levels last seen in July, before easing back slightly. It also firmed against the euro. The strong pound weighed on London’s FTSE 100 index, however, dragged down by falls to share prices of multinationals earning in dollars.

The pound had come under pressure on Monday after European officials played down the chances of an agreement that had been aired by British Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar last week.

On Wall Street, the Dow Jones index rose at the start of trading, helping eurozone stock markets hold on to morning gains.

Asian equity markets earlier closed mixed as investor caution returned, replacing the optimism fanned by Donald Trump’s partial China trade deal.

Meanwhile, the IMF added to global worries about growth, saying Tuesday that the world economy is slowing to its weakest pace since the global financial crisis, amid continuing trade conflicts that have undercut business confidence and investment.