The pound hit a five-day high versus the dollar on Tuesday as the greenback lost momentum, but the outlook for the British currency was clouded by fresh angst over Brexit and doubts about the economy.
Weak economic data and renewed political uncertainty over the government’s Brexit position hammered sterling last week and sent it to 10-month lows.
The currency has in recent sessions, however, clawed back some gains against the dollar and the euro despite weaker-than-expected retail sales and softer inflation data.
On Tuesday, British Prime Minister Theresa May said she would now lead negotiations with the European Union and Brexit minister David Raab urged the EU to respond to a policy document in order to reach a deal on Britain’s departure by October.
That gave sterling a modest boost and at 1515 GMT the currency was up 0.4 percent against the dollar at $1.3150 and up 0.2 percent against the euro at 89 pence, a four-day high.
Next week the Bank of England meets, and markets are giving an 80 percent chance that it will increase interest rates.
In the lead up to the BoE meeting the pound could enjoy a further recovery although it is unlikely to last after the rate hike decision, said Richard Falkenhall, a senior FX strategist at SEB.
With no clear sense of direction, sterling remains vulnerable to moves in other currencies.
It fell to a three-week low against a resurgent yen on Monday after the Japanese currency received a boost from reports the central bank was contemplating scaling back its stimulus.
And the pound rallied against the dollar on Friday after U.S. President Donald Trump criticized the Federal Reserve’s policy on raising interest rates and accused the European Union and China of manipulating their currencies.
Sterling looks set for more volatility, especially if there are signs that support for a “hard” Brexit – crashing out of the European Union without a trade deal in place – is gaining ground.
“The price of the pound continues to reflect an enigma of uncertainties: a fragile UK government, uncertainty over the Brexit end-state and economic policy uncertainty,” said Viraj Patel, FX strategist, at ING in London.
Patel said that the pound could fall against the euro to 92 pence in the third quarter of 2018 if Brexit anxieties persist.
Britain called on European Union negotiators on Monday to urgently change their approach to Brexit or face the turmoil of a “no-deal by accident.”
With just over eight months left until Britain is due to leave the EU, there is little clarity about how trade will flow as May, who is grappling with a rebellion in her party, is still trying to strike a deal with the bloc.
EU chief Brexit negotiator Michel Barnier said last week that May’s new Brexit proposals contained constructive elements, though he added that many questions remain.