* (Recasts with afternoon recovery, adds more comment)
By Patrick Graham
LONDON, Jan 10 (Reuters) - 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 pressure.
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 speakers.
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 Williams)