Sterling will jump three per cent if it looks likely the government will secure a Brexit deal, but will drop five per cent if talks fail, according to a Reuters poll.
The pound plummeted following the 2016 referendum and has been volatile ever since as the market reacts to every development in the Brexit negotiations.
Read more: Pound rises on May-Corbyn Brexit talks
The pound made a strong start this morning following reports European Council President Donald Tusk would offer a 12-month flexible extension, allowing the UK to leave the bloc earlier if a deal is secured.
But the offer is at odds with a proposal penned by May this morning, which requested an extension of the deadline to 30 June. The pound is now trading at $1.3089.
Connor Campbell, financial analyst at Spreadex, warned the pound’s gains are “always under threat at the moment”.
The Reuters poll also found sterling will edge up roughly 1.75 per cent if it looks likely a long delay to the Brexit process will be agreed.
Read more: May asks EU for longer Brexit delay
The poll of nearly 70 foreign exchange strategists said the pound will be trading at $1.32 in a month, $1.35 in six months and $1.38 in a year, suggesting a no-deal Brexit is not expected.
In addition, respondents predicted the Bank of England would raise borrowing costs towards the end of the year and then again in the second half of 2020.