Sterling hit a one-month low against the dollar on Tuesday, stung by comments from a Bank of England policymaker that Britain faces the risk of sliding into recession. It recouped some of those losses after the dollar fell on gloomy US housing numbers.
But any bounce was likely to be short-lived as traders said a fall in stocks, implying a decline in investor appetite for risk, would keep sentiment skittish as the pound is considered a higher-risk currency.
By 1504 GMT, sterling recovered some ground to trade at $1.5455, still down 0.35 percent on the day. The BoE is expected to keep interest rates at a record low 0.5 percent well into 2011, and the central bank has said it remains ready to add more stimulus to the economy if necessary. Analysts said sterling would be vulnerable in the future to dovish comments similar to Weale's.
Sterling three-month implied volatility was at around 11.75, down from a peak of 12.35 on August 13. Sterling extended losses on Tuesday after it broke under its 200-day moving average at $1.5469. A close below that level would open the door to more losses, technical analysts said.
Losses against the dollar helped push sterling lower against the euro, which rose more than half a percent to the day's high of 82.19 pence, pulling away from 81.43 pence hit on Monday, its weakest in nearly eight weeks. But they added the euro's outlook remained dim and that the near-term target was 80.67 pence, a low hit in June. Sterling fell sharply against the yen, hitting a three-month low of 128.82 yen.