By Elizabeth Howcroft
LONDON (Reuters) - Sterling jumped on Thursday after the British and Irish prime ministers revived hopes of a possible Brexit deal.
Boris Johnson and Leo Varadkar issued a joint statement saying they "could see a pathway to a possible deal" after a meeting which was seen by traders as a last-ditch attempt to revive talks over a possible deal over Britain's withdrawal from the European Union, scheduled for Oct. 31.
The pound jumped and then extended its rise all the way to $1.2394, up 1.4% on the day, after an Irish Times reporter said there had been very significant movement from the British side on customs - a key sticking point - in the talks.
Versus a stronger euro, sterling rallied 1% to 88.90 pence.
Short-dated British government bond yields also recorded their biggest one-day rise in five weeks.
"Market hopes for a deal after all have been revived by these comments, following the rather negative comments that we saw in the last couple of days," Commerzbank strategist Thu Lan Nguyen said, after Johnson and Varadkar's statement.
"Overall I think the base case for the majority of market participants is that Brexit will be postponed," she said, adding the market was not betting on a deal being reached by the end of the month, or the EU summit on Oct. 17-18.
A flurry of British data earlier on Thursday, including gross domestic product and industrial production figures, had little impact on the pound, which has been driven primarily by politics as the scheduled Brexit date looms closer.
Johnson has said Britain will leave the EU on Oct. 31, deal or no deal, but parliament has passed a law requiring him to request an extension if he fails to reach a divorce agreement. Any delay is expected to be followed by an early election.
The pound held at a one-month low against a trade-weighted basket of currencies published by the Bank of England.
The British currency has been driven by Brexit headlines again this week. It jumped on Wednesday after reports of a breakthrough on the vexed issue of avoiding customs checks on the Irish border and then gave up its gains as hopes of progress were dashed.
Thursday's economic data calmed fears that Britain is approaching a technical recession, defined as two successive quarters of negative growth.
GDP in the three months to August was 0.3% higher than in the previous three-month period, beating all forecasts in a Reuters poll of economists. However, economic growth in August dropped by 0.1% on the month against economists' average forecast for it to hold steady.
"The risk of a no-deal Brexit every few months is weighing on both investment and consumer spending," said Andrew Wishart, an economist at Capital Economics in a note.
Bank of England Governor Mark Carney said UK growth was "very modest" and Thursday's figures were consistent with a picture of soft underlying growth.
Expectations for a BoE rate cut have risen in recent weeks, with markets fully pricing in a 25 basis point cut by May 2020.
For a graphic on Sterling, click https://fingfx.thomsonreuters.com/gfx/mkt/12/7161/7092/GBP1010.png
(Reporting by Elizabeth Howcroft and Dhara Ranasinghe; Editing by Gareth Jones and Mark Potter)