The pound gained ground as worries over Theresa May’s leadership subsided last night amid rumours of a cabinet reshuffle.
Sterling rose nearly 0.8% against the US dollar around midday, but settled closer to 0.5% higher in afternoon trading at 1.312.
Versus the euro, the pound was up 0.4% at 1.117.
It follows a difficult few days for the pound, which tumbled to near four-and-a-half week lows on Friday following reports of a Tory plot to topple the Prime Minister.
David Madden, a market analyst at CMC Markets UK, said: “GBP/USD gained ground today after Theresa May hinted at a possible cabinet reshuffle to get the party into line.
“The pound sold-off last week as there were growing rumours of a possible leadership challenge, and the talk of a re-jig to her team has injected some much needed optimism into the pound.
“Sterling was also helped by pullbacks in the greenback as it was hit by profit taking. There were many aspects of last week’s US non-farm payrolls report that were very positive for the US dollar.”
The UK currency’s gains weighed on the FTSE 100, as many of its listed components tend to benefit when foreign currencies are stronger.
London’s blue chip index ended the day down 0.2% or 14.98 points at 7,507.89.
It fell behind its European peers, with the French Cac 40 and German Dax closing higher by 0.1% and 0.16%, respectively.
Brent crude prices edged higher by 0.2% to 55.59 per barrel following comments by Opec suggesting that “extraordinary” measures may be needed to rebalance the oil market.
Mr Madden said: “The oil-producing group has a track record of talking tough, and not always delivering so traders aren’t overly fearful of any sudden change to supply.
“Adding to that, the cartel often has trouble reaching a policy that can be agreed upon by all its members, so this could be the beginning of talks about a possible shift in policy.”
In UK stocks, Wood Group dropped 7.5p to 722.5p as it announced the formal completion of its £2.2 billion takeover of Amec Foster Wheeler, having agreed to offload the majority of its North Sea operations in order to address competition concerns.