The British pound recouped some losses after dropping to its lowest in weeks on Tuesday amid concerns about the state of the economy and talk of a possible cut in interest rates this month.
The pound fell to a seven-week low against the euro and a new 2020 low versus the dollar before recovering some ground as investors scaled back expectations for further monetary easing at the next Bank of England policy meeting on Jan. 30.
Sterling fell sharply on Monday after a BoE policymaker said he would vote for a rate cut unless economic data improved significantly. Growth and industrial production data published on Monday were worse than expected, causing a spike in expectations for lower rates.
Money markets are now pricing in a 43% chance for a 25 basis point cut in rates at the end of this month from the current level of 0.75%, down from close to a 50% chance earlier on Tuesday. On Friday, markets had priced in a 20% chance.
A full rate cut is priced in by December this year.
Viraj Patel, a global macro strategist at Arkera, said he did not believe the Bank of England would cut rates at its January meeting, although markets are now shifting towards this idea.
"Expectations becoming embedded into markets may force the BoE's hand. Either way the bulk of the dovish BoE re-pricing has happened in $GBP markets," he said.
Sterling was last trading up 0.1% at $1.3002, having weakened to as low as $1.2955 earlier, bringing its year-to-date losses to almost 2%.
The pound rose against the euro by 0.2% to 85.51 pence, after having earlier dropped to 85.95 pence, its weakest since Nov. 22.
Short sterling futures abated slightly on Tuesday after rallying to their highest in 1-1/2-months on Monday as investors scaled up their bets on a cut in interest rates.
"With GBP/USD speculative positioning turning sharply over recent months, the downside risk to GBP is building," ING analysts noted, referring to investors' shift to a net long pound position from a sizeable net short last month.
"Bar a possible rate cut, the uncertainty about the EU-UK trade deal should also limit GBP upside throughout 1H20."
The currency is being pressured by concerns about Britain's ability to agree a trade deal with the European Union before the end of a Brexit transition period that Prime Minister Boris Johnson has said must conclude at the end of 2020.
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