Hopes that a coronavirus vaccine would put the British economy back on track pushed the pound 1% higher versus the euro on Tuesday, as the threat posed by COVID-19 appeared to recede.
Sterling also got a boost from hopes that Britain could clinch a post-Brexit trade agreement with the European Union by the end of the year, following comments from UK government officials that a deal was imminent.
The pound was last trading at 88.94 pence against the common currency, having hit earlier a fresh two-month high of 88.85 pence, 1% stronger on the day. If it were to rise above 88.66 pence, the gains would take it to a five-month high or even a six-month high.
Sterling also extended gains versus the U.S. dollar, trading last up 0.7% on the day at $1.3257, having touched a two-month high of $1.3269 earlier.
Traders had ignored the fact that British employers made a record number of staff redundant in the third quarter as appetite for buying riskier assets grew after Pfizer and BioNTech announced a promising coronavirus vaccine on Monday, coupled with Brexit optimism. 
Echoing comments by Prime Minister Boris Johnson, British finance minister Rishi Sunak said on Monday that Britain and the EU have made progress in talks about a trade agreement and a deal can be done.
He also said that the government was unilaterally setting out how it would let European Union financial services operate in Britain after a post-Brexit transition period ends on Dec. 31.
Sterling could go as high as $1.40 by the end of the year if Britain and the EU agree on a trade deal this week and “talk of negative rates melts away,” said Kit Juckes, macro strategist at Societe Generale/
Money markets have pushed back expectations UK interest rates will turn negative, to June 2021 from May.
“A vaccine could make the biggest difference to the economic outlook for those countries that have struggled the most, especially with large services sectors like the UK,” said Stephen Innes, chief global market Strategist at Axi.
An obstacle that might have the EU from signing off on a deal and possibly put off the U.S. president-elect, Joe Biden – the Internal Market Bill – was taken off the table after Johnson suffered a heavy defeat in parliament’s upper chamber on Monday.
The proposed laws would have allowed Johnson to breach Britain’s EU exit treaty – a plan that has been criticised by Biden.
Three-month implied volatility gauges in sterling have picked up a bit, but the levels are still around where they were in September. That suggests investors are less worried about unexpected moves in the currency as Britain leaves the EU.