European Union leaders this week agreed to an up to six-month delay to Brexit, removing the immediate threat of a no-deal exit for Britain but also leaving the likelihood of months of political uncertainty in the United Kingdom.

ING analysts said they expect sterling to fall over the next few months, in part because a Conservative party leadership battle could result in a eurosceptic prime minister, and also because the six-month Brexit delay was too short for the Bank of England to tighten monetary policy.

The "partial clean-up of the GBP short positioning (and some built-up of new speculative longs) since the beginning of the year can also add to the reversal as GBP positioning is no longer meaningfully skewed one way," the analysts wrote in a note.

The Dutch bank predicts sterling will test levels of 88 pence per euro and $1.27.

On Friday sterling rose marginally to $1.3069 while against a rallying euro the pound dropped 0.3 percent to 86.5 pence.

With investors unsure of immediate drivers for the pound, volatility expectations have plummeted.

One-month implied volatility - a gauge of expected price swings - has tumbled to its lowest since January last year. Three and six-month measures are at similar lows.