Sterling jumped half a percent to as high as $1.2860 versus the dollar, while against a broadly weaker euro the pound added 0.7 percent to reach 87.62 pence. Analysts said that while sterling's earlier strength owed itself to the decent January retail sales numbers, the later move upwards may be because of thin liquidity in late Friday trading and some hedge fund purchases of the pound.
The Irish foreign minister also told Reuters that despite May's latest parliamentary loss, European Union states still stand willing to offer a package to help her get a Brexit withdrawal deal over the line. On a weekly basis, the British currency remains set for its third consecutive drop.
With less than six weeks before the March 29 exit date, May has stepped up efforts to convince the European Union to grant her concessions. "The constant Brexit can-kicking has also increased the risks of a disorderly exit," strategists at BNP Paribas said in a daily note.
May has promised that if parliament has not approved a deal by Feb. 26, she will make a statement updating lawmakers on her progress on that day and lawmakers will have an opportunity on Feb. 27 to debate and vote on the way forward. Sterling's large Friday gains against the single currency came as the euro fell across the board after a European Central Bank board member said policymakers were discussing whether to issue new multi-year cheap loans to banks.
Dwindling expectations that the Bank of England will raise interest rates this year have weighed on the pound in recent days. Swap markets indicate a 28 percent probability rates will rise, compared with 30 percent earlier this week. Derivatives markets painted a slightly more cautious picture for the pound, with one-month implied volatility picking up from December lows and rising to 9 vol on Friday.
Risk reversals, a market gauge of the ratio of puts to calls on a currency, indicate investors are leaning towards buying options to protect themselves against further downside in the British currency.