Sterling regained its morning losses on Monday afternoon after currency buyers appeared to trade on some hand signals from a politician at the center of Brexit negotiations.
Senior U.K. ministers were hunkered down in a cabinet meeting with Prime Minister Theresa May Tuesday morning, as the leader has tried to co-ordinate support for her plan to withdraw Britain from the European Union.
Upon leaving the meeting, the U.K.'s top negotiator in the Brexit talks, Dominic Raab, reportedly gave a thumbs up to press camped outside Downing Street. The hand signal from Raab was then tweeted by the BBC's political editor.
In an apparent interpretation that May had succeeded in attaining some form of cabinet unity, traders of sterling hit the buy button to recoup morning losses and bring the currency back near session highs.
Sterling had fallen sharply against the U.S. dollar earlier in the day after a politician, crucial to Theresa May's grip on power, suggested the country is heading for a no-deal Brexit.
Shortly after 10.a.m. London time, the pound fell from its session high of $1.308 to $1.302 as investors digested the remarks on Twitter from the Chief Whip of Northern Ireland's Democratic Unionist Party (DUP) Jeffrey Donaldson.
"Looks like we are heading for no deal," the lawmaker said, before adding: "Such an outcome will have serious consequences for economy of (the) Irish Republic. In addition, U.K. won't have to pay a penny more to EU, which means big increase for Dublin. Can't understand why Irish government seems so intent on this course."
The DUP is crucial to the U.K.'s ruling Conservative Party as it provides May with the crucial votes that allow her to hold the balance of power in the British Parliament.
Its hand in matters relating to Brexit is crucial as the border between Northern Ireland, which is part of the United Kingdom, and the Republic of Ireland, which is set to stay in the European Union, has become the major sticking point in negotiations with Brussels.
The pound has rallied in the last few days on the back of optimism surrounding a Brexit deal. However, analysts have warned that the currency could continue to see some volatility. "Whether Brexit is hard or soft, Britain is in for a demand shock, a reduction in the rate of potential output growth and a sterling crash," High Frequency Economics said in a research note on Monday.
"We expect sterling to extend its fall regardless of any Brexit deal."