Sterling rebounded off six-week lows against the dollar on Tuesday after better-than-expected construction activity data offset fears of a hard Brexit fuelled by the government's tough stance in European Union trade talks.
The move reversed losses in early trading against the broadly stronger greenback which extended Monday's 1% slump on renewed concern Britain may fail to clinch a trade deal by the end of an 11-month transition period.
By 1530 GMT, the pound was up 0.2% to $1.3025, not far from the day's high of $1.3046. It had dropped to as low as $1.2942 in early trading.
Sterling was last 0.4% higher versus the euro to 84.73 pence .
The EU and Britain clashed over a post-Brexit trade deal on Monday with the two sides setting out very different visions of a future relationship.
Prime Minister Boris Johnson has said Britain will not adhere to the bloc's regulations while the EU has warned that the country's access to its single market will hinge on adherence to its rules on the environment and labour.
But investors put aside some of those worries after a survey showed Britain's building industry had its best month-on-month improvement in almost two years after Johnson's election win removed some short-term uncertainty.
Some survey respondents said the reduction in political uncertainty after the Dec. 12 election might unlock new projects and boost client spending.
"We've had some constructive data and at the moment, sterling has a new sensitivity to data, so maybe markets thought the move yesterday was a bit too much in terms of pricing in uncertainty," said Francesco Pesole, currency strategist at ING.
"Looking ahead, there's still a lot of uncertainty, so I'm not convinced that's its the end of the downturn for sterling."
Sterling may also be benefiting from an improvement in overall market sentiment, with stock markets stabilising and the yen falling 0.6%.
The pound has spent a volatile four sessions, rising as high as $1.3210 on Friday after the Bank of England kept rates on hold on Thursday. It came under heavy pressure on Monday and briefly slipped to a six-week low on Tuesday.
Positioning data from the US Commodity Futures Trading Commission shows speculators' bullish bets on sterling had moderated in the week to January 28 but remain broadly intact. This week's selloff suggests those positions are being unwound.
However, Stephen Gallo, European head of FX strategy at BMO Capital, said sterling would get support from additional government spending, making bearish bets an unattractive proposition. "We're still inclined to look for buying opportunities, particularly versus the euro," Gallo told clients.
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