The pound had come under pressure on Monday after European officials played down the chances of an agreement that had been aired by British Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar last week.
With the spotlight on Brexit, September inflation data had little market impact.
The pound hit a five-month high against the us dollar on news of a Brexit deal, then sank back as traders heard Johnson's Northern Irish allies were still unhappy with the way the deal handles the border between Ireland and Northern Ireland - the only land border between the United Kingdom and the bloc and long one of the thorniest issues of any exit.
On Thursday, the Chinese commerce ministry said that China hoped to reach a phased agreement with the United States over trade as early as possible.
In another sign the trade dispute is dragging on economic growth, data from China showed its third-quarter economic growth slowed to its weakest pace in nearly three decades.
SEB didn't provide targets for the Pound-to-Dollar rate Friday but the projection of a near-five cent increase in the Pound-to-Euro rate occurring, concurrent with an also-unspecified increase in the Euro-to-Dollar rate, implies substantial gains for the Sterling relative to the greenback.
Of course, if negotiations fall through it could worsen concerns that UK Prime Minister Boris Johnson will attempt to force through a no-deal Brexit at the end of October.
If Parliament does manage to pass the deal this week, the pound could test May's peak of around $1.3185, the TD strategists forecast, though they see it struggling to move higher in the absence of fresh catalysts.
The Dow Jones Industrial Average .DJI fell 22.82 points, or 0.08%, to 27,001.98.
UK's benchmark FTSE 100 closed down by 0.44 percent, Germany's Dax ended down by -0.17 percent, France's CAC finished the day down by 0.83 percent.
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However, sterling then dipped under $1.29 as it became evident that Johnson faced an uphill task in getting the deal past lawmakers, with opposition MPs and some in his own Conservative party saying they were against it.
"This could be the "white smoke" moment where we see the outline of an agreement and can judge the likelihood of domestic ratification", said Stephen Innes at AxiTrader.
Wall Street was mixed in late morning trading, with trading volumes low on the Columbus Day holiday.
However, losses were limited by comments from US Treasury Secretary Steven Mnuchin who said that US and Chinese negotiating teams were working on securing a text for the Phase 1 trade deal. The unexpected drop in retail sales was partly due to a marked drop in sales by auto dealers and parts dealers, which fell 0.9 per cent in September after rising 1.9 per cent in August. Britain's inflation rate failed to rise as expected last month as petrol prices fell at the fastest rate in more than three years, a boost to consumers ahead of Brexit.
But he also said there were no plans for another high-level meeting on the trade deal outlined last week.
The euro meanwhile continued to creep upwards, making a 7-week high of $1.1145.
The figures weighed heavily on the oil market, with crude futures slumping around 2%.
"Gold will be range-bound until and unless we have some clarity on Brexit and other geo-political risks", Lan said adding that he expects gold to trade around $1,475 and $1,503 per ounce in the short term.
US West Texas Intermediate (WTI) crude futures edged up by 35 cents to $54.28.