FILE PHOTO: Pound Sterling notes and change are seen inside a cash register in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble/File Photo

LONDON (Reuters) - Sterling strengthened against the dollar and hit a 3-1/2 month high versus the euro on Tuesday after Dow Jones reported that the UK and European Union were making progress in Brexit talks and divorce terms could be settled next week.

The pound rose 0.4 percent to hit $1.3143, after trading at around $1.31 before the report. Against the euro sterling rose 0.4 percent to 87.38, its highest level since June 21.

Neil Jones, head of FX hedge fund sales at Mizuho, said talk of agreement on divorce terms as soon as Monday had boosted sterling given any deal was considered much further off. “It will be enough to keep the pound bid for now,” he said.