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The pound has surged against the dollar and the euro amid growing optimism a Brexit deal is close to being agreed.

Sterling leapt 1.4% to trade at $1.3036 against the dollar in afternoon trade, whilst against the euro it jumped to a near seven-month high of €1.1542.

The move came after a significant breakthrough in talks between UK and EU officials with the draft text of a Brexit deal agreed.

But analysts warned the pound's rally could be short lived.

"With the UK Cabinet and Parliament yet to agree to the plans, we are clearly not out of the woods yet," said Capital Economics economist Ruth Gregory.

She said she would not be surprised if a deal wasn't secured until "well into" next year, with the pound likely to "pull back" again by the end of the year.

Pound surges against the dollar

Neil Mellor, currency strategist at BNY Mellon, was also wary, warning Prime Minister Theresa May still had to convince party members as well as the Northern Irish Democratic Unionist Party (DUP), which props up her minority government.

"Ms May's proposals are tasked with healing an increasingly divided Conservative party while also keeping the party's DUP allies onside," he said.

Aberdeen Standard Investments political economist Stephanie Kelly. cautioned this wasn't a "foregone conclusion".

"The devil will be in the detail of the Irish border issue. Everything hangs on that and ultimately whether Theresa May can get this past Parliament,"

The pound has been very volatile since the outcome of the referendum to leave the EU in June 2016, and remains around 10% lower against both the dollar and the euro since then.

On Monday, fears that talks between the EU and the UK had hit a deadlock sent the pound tumbling.

Pound nears seven-month high against euro