Sterling has strengthened for most of this week, largely on the back of broad dollar weakness but also on signs that the British economy is holding up relatively well ahead of Brexit.

Retail sales data came in far better than expected on Thursday and data on Friday showed that the British economy was 0.6 percent larger year-on-year in the third quarter, although business investment has fallen.

The Bank of England left interest rates on hold this week but warned about the growing risk of a no-deal Brexit.

Sterling "is tentatively consolidating its recent recovery. Public sector net borrowing figures were slightly better than expected and the final release of Q3 GDP offered no surprises. The recent narrowing in yield spreads is offering fundamental support and risk reversals are fading," Scotiabank analysts said.

As the dollar rebounded across currencies, the pound slipped 0.1 percent to $1.2648 in European trading, bringing its week-to-date gains to 0.5 percent. That puts sterling on track for its best weekly rise in seven weeks.

Against the euro, sterling gained 0.3 percent to 90.185 pence.

Despite the Brexit concerns, some foreign exchange analysts are predicting a bounce for sterling.

"According to our long-term valuation models for EUR/GBP, a fundamentally reasonable level for the currency pair would be around 0.75 instead of around 0.90 (pence per euro), said SEB analysts.

"Simply taking the expected EUR/GBP reactions in each one of the different alternative Brexit scenarios and the probabilities it would play out gives an expected value for EUR/GBP of 0.85."

Traders are predicting a volatile period for sterling in January, when Prime Minister Theresa May will seek parliamentary approval for her much-criticised Brexit deal.

Fears have grown that the United Kingdom will quit the European Union in March without a transition deal to minimise disruption.