LONDON: Sterling bounced from early lows in volatile trading before a central bank meeting on Thursday, though reports of a potential leadership challenge to Prime Minister Theresa May weighed on sentiment.
The pound fell as much as a quarter of a percent to a low of $1.2994 against the dollar after the BBC reported a group of about 50 lawmakers in May's ruling Conservative Party had met to discuss how and when they could force her out of her job.
But it edged off its lows to trade broadly flat on the day at $1.3018 in mid-morning trades after European Commission head Jean-Claude Juncker renewed a pledge of close trade and security ties with Britain after Brexit.
"It is clear that the stories about an imminent challenge to Theresa May are still weighing on sentiment and the pound will find it hard to rally too far before more clarity on Brexit emerges," said John Marley, a senior currency consultant at FX risk management specialist, SmartCurrencyBusiness.
The rebellious Conservative lawmakers have condemned May's plans for Britain to remain in a free trade zone for goods with the EU after it leaves the bloc on March 29, 2019.
In choppy trading in recent days, sterling had hit five-week highs of $1.3087 on renewed hopes of a speedy Brexit deal with Brussels.
While recent signals from Brussels have pointed to renewed confidence that Britain and the European Union can agree a deal to govern trading relations after Brexit, divisions within May's government over Brexit continue to rattle markets.
The pound has lurched up and down on almost every Brexit-related headline in the past week, as traders struggle to decipher whether Britain can avoid a no-deal Brexit when it leaves the EU.
Positive economic data in Britain published this week, including relatively strong GDP numbers, have been pushed into the background as investors focus on Brexit developments.
Traders and analysts say many investors are reluctant to take out big directional bets on sterling because of the uncertainty about where the Brexit negotiations are headed.
"The market is very focused on the immediate and now rather than the future," said Neil Mellor, an analyst at BNY Mellon.
Mellor said that investors were increasingly confident EU leaders would rally round May to try and secure a Brexit agreement, reflected in the fact sterling had traded away from its 2018 lows of below $1.27 in mid-August.