The pound was neutral on Wednesday as investors calculated the risks the upcoming general election poses to Britain's ability to complete its exit from the European Union before Jan. 31, its latest departure deadline.
Traders also waited to see what the Bank of England (BoE) might have to say regarding the impact of Brexit on the British economy, after its meeting on Thursday.
Uncertainty around Britain's departure from the EU has left a strong mark on business confidence and weak economic data makes it increasingly likely that BoE's next move will be to cut interest rates, rather than an increase.
But money markets do not expect the central bank to cut rates in the near term until more clarity emerges on the political front.
Small British manufacturing firms are their most pessimistic since just after the Brexit referendum in 2016 as they face political uncertainty at home and trade wars abroad, according to a survey published on Wednesday.
Prime Minister Boris Johnson called for an early election to break the Brexit impasse in the hope of gaining a majority in parliament to be able to pass his Brexit deal. His campaign was launched on Tuesday.
But with the election set for Dec. 12, the country will have little time before it is due to leave the EU. It would then have to reach agreement on a future trading relationship.
"There is a lot of pressure to get a trade deal done in a very short period of time and (EU Brexit negotiator Michel) Barnier is indicating that could be tough," said Jane Foley, senior currency strategist at Rabobank.
The EU's Brexit negotiator, Michel Barnier, said on Tuesday that negotiations on a future trading relationship with Britain would be "difficult and demanding", as the bloc "will not tolerate unfair competitive advantage".
"So for sterling there is the possibility that a lot of a good news that was built into the price in October could start to seep out," Foley said.
Sterling was last flat against the dollar and the euro at $1.2877 and 86.00 pence respectively. It gained more than 5% last month as traders wound off their short positions on the currency in the hope that a no-deal Brexit was averted.
Leveraged funds now hold $2.61 billion of shorts, far less than the $7.81 billion held at the beginning of August.
With the BoE set to hold the key benchmark rate unchanged at 0.75% on Thursday and the general election less than six weeks away, investors will be watching closely any changes in opinion poll trends for the major political parties before adding positions on the pound.
The central bank must also contend with prospects of the Dec. 12 election yielding another hung parliament, which could drag the Brexit debate beyond Jan. 31, the third deadline for Britain to leave the European Union.
UBS Wealth Management funds have been overweight sterling against the dollar for some time, according to Turner, as they see Britain's currency as undervalued.
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