Sterling rose on Monday, boosted by expectations of inflows after Japan's Softbank agreed to buy chip designer ARM in a 24.3 billion pound ($32.2 billion) deal which should help plug Britain's yawning current account gap.
The pound extended gains after Bank of England policymaker Martin Weale said he was unsure if he would back an interest rate cut at next month's meeting. That contrasts with most of his colleagues who think a rate cut is likely, given expectations that the UK could slip into recession.
Weale, who is a noted hawk and will step down after next month's meeting, said he did not see any sense of panic among consumers or businesses after Britain's vote to leave the European Union last month, and that the central bank should not be afraid of disappointing markets.
Sterling hit a day's high of $1.3292 after Weale's comments, having traded at $1.3245 beforehand. In afternoon trade, it was at $1.3250, up 0.4 percent on the day.
The euro fell to 83.225 pence before rising to 83.50 pence, still down 0.25 percent on the day. Traders said a calmer tone in global markets after jitters over a failed coup in Turkey subsided, was also helping the pound.
Earlier, sterling rose on hopes that the Softbank deal would help soothe investors' fears about Britain's current account gap. Finance minister Philip Hammond welcomed the all-cash deal and said Britain remained an attractive destination for investment after the Brexit vote.
ARM, the most valuable tech company listed in London, is a major presence in mobile processing, with its processor and graphics technology used by Samsung, Huawei and Apple in their in-house designed microchips. The deal is also Softbank's largest to date.
"The big business news headline... is that Softbank has agreed to buy ARM Holdings. That's three months of the UK's current account deficit financed in one fell swoop," said Kit Juckes, head of currency strategy at Societe Generale.
Sterling had fallen to a 31-year low against the dollar after Britain voted on June 23 to exit the EU.
Investors are worried that Britain will face a recession in coming quarters and will find it increasingly hard to finance its current account deficit - currently at around 5 percent of GDP - and amongst the highest in the developed world.
Nevertheless, the sharp drop in the value of the pound has made UK companies, backed by strong balance sheets and world-class technology, attractive to overseas investors.
"The devaluation of sterling will continue to provide interesting investment opportunities for overseas investors to buy UK assets, including central London property, at a discount," said John Haynes, Head of Research at Investec Wealth & Investment.
Despite Monday's bounce, traders were cautious about the currency with recent surveys pointing to a weakening in business and consumer confidence.
A survey by Deloitte released on Monday showed Britain's biggest companies are beset by doubts about the future after last month's vote and have slashed their investment plans. And a survey by the British Retail Consortium found that the number of shoppers heading to the high streets and retail centres fell at the fastest pace in more than two years in June.
These factors kept alive expectations that the Bank of England would ease monetary policy next month.
"We expect front loaded sterling/dollar weakness as the BoE adopts a range of easing measures at their August meeting and choose this pair as our trade of the week," Morgan Stanley said in a morning note. They target a drop to $1.25 with a stop loss at $1.38.