(Recasts with afternoon recovery, adds more comment)
By Patrick Graham
LONDON Jan 10 Sterling recovered from a slide
to two-month lows against both the dollar and euro to end
marginally higher on Tuesday as a week of worry about Britain's
plans to leave the European Union kept the currency under heavy
Morning trade in London had seen the pound add to losses of
more than 1 percent suffered the previous day, before it
steadied above $1.2100 and 87.50 pence per euro.
Dealers said further weakness this week was likely to depend
on the messages sent by Prime Minister Theresa May in parliament
on Wednesday as well as a number of U.S. Federal Reserve
Positioning analysis from French bank BNP Paribas pointed to
a growth in the past week in bets against the pound from a
number of the big FX funds that handle trading for many of the
world's big pension and asset managers.
That was driven on by an interview with Prime Minister May
on Sunday which fuelled fears she was setting course for a "hard
Brexit" where immigration control is put above retaining access
to the EU's lucrative single market.
"The very short term bias is that the sell-off can extend a
little on the downside, but we wouldn't be looking for any big
moves," BNP strategist Sam Lynton-Brown said.
"The market is still digesting the prime minister's
interview from the weekend and will be looking to PM's questions
tomorrow and an expected speech next week for more direction."
Fears a "hard Brexit" will hammer the UK as an economy and
destination for investment is at the heart of a sell-off that
has knocked 19 percent off sterling against the dollar since
Britons voted to leave the EU last June.
The latest push lower came after a series of upbeat surveys
on the economy last week as well as 1 percent annual growth in
British Retail Consortium retail sales data on Tuesday.
Other risks playing into sterling's weakness include a
Supreme Court ruling on parliament's place in the Brexit
process, the chances of another Scottish independence referendum
and a political crisis in Northern Ireland, which voted for
staying in the EU last year.
The UK government's Northern Ireland minister warned on
Tuesday that an early election in the province was highly likely
following the resignation of deputy First Minister, Martin
McGuinness, which effectively collapsed its devolved government.
"The market is just piling in to sterling shorts following
Theresa May's comments and given that we are expected to get a
pick up in Brexit noise," said ING FX strategist Viraj Patel
"We could even get a test of the $1.20 level in the next
couple of weeks."
(Additional reporting by Marc Jones; Editing by Alison