The pound hit a four-month high against the euro on Tuesday amid reports that EU and UK authorities could reach a Brexit divorce deal as early as next week.
Sterling was at its highest level versus the eurozone currency since June, rising 0.4% to trade at 1.144.
The currency was hovering near a two-week high against the US dollar at 1.313.
Reports suggest that UK and EU deal makers could clinch an exit agreement before a summit of EU leaders scheduled for next week.
Negotiators are said to have made progress on the Irish border issue which could involve some border checks on goods between mainland Britain to Northern Ireland, but none between Northern Ireland and the Republic of Ireland.
But Fiona Cincotta, a senior market analyst at City Index, said parliamentary opposition is still a major stumbling block towards a deal.
“Despite a rallying party conference speech last week PM Theresa May has not been able to do much to unite her own ranks and there is still a high number of MPs likely to vote against any deal.
“The pound is holding up surprisingly well given the amount of uncertainty, feeding off the volatility in the US and European bond markets.”
The strength of the pound was weighing on the FTSE 100, as many of its multinational constituents tend to benefit when foreign currencies are stronger.
The blue chip index ended the day relatively flat, up just 0.06% or 4.26 points at 7,237.59.
The French Cac 40 and German Dax were up around 0.35% and 0.25%, respectively.
Brent crude prices rose 1.2% to 84.77 US dollars per barrel, as a drop in exports from Iran, which is facing US sanctions, and a partial closure of productions in the Gulf of Mexico,threatened to weaken supplies.
In UK stocks, Paddy Power Betfair shares were at the bottom of the FTSE 100, falling 325p at 6,175p after Ireland announce plans to raise betting tax from 1% to 2% as part of the 2019 budget.
The Irish Bookmakers Association has said the move was a “major blow” to the industry.
Aviva fell 2.1p to 463.1p after the insurance group announced that chief executive Mark Wilson would stand down after more than five years at the helm.
The move follows Mr Wilson’s decision in March to join the board of rival asset manager BlackRock, which angered some shareholders.
Sky shares were nearly flat, up 1p at 1,726.5p. The company’s chairman James Murdoch resigned from the broadcaster as US cable giant Comcast took formal control of the British firm, having acquired more than 75% of the business.
It comes after Comcast snapped up the 39% stake that belonged to Rupert Murdoch’s 21st Century Fox.
Greggs surged 46p to 1,052p after reporting 7.3% rise in total sales, marking a pick up since the first half when sales were up just 1.5%.
The bakery chain was helped by demand for focaccia-style pizzas and a summer drinks range.
The biggest risers on the FTSE 100 were Royal Mail up 14.6p at 353p, Evraz up 17.4p at 564.8p, Anglo American up 45.6p at 1,692.4p, and Tesco up 5.2p at 215.3p.
The biggest fallers on the FTSE 100 were Paddy Power Betfair down 325p at 6,175p, Smurfit Kappa Group down 124p at 2,736p, DS Smith down 11.7p at 447.2p, Vodafone Group down 3.86p at 150.72p.