Sterling recovered on Monday from 2-1/2 month lows, holding its own against the broadly stronger dollar following last week's sell-off that was driven by concerns over Britain's trade talks with the European Union.

The pound tumbled 2.4% last week against the dollar, its biggest weekly fall in seven weeks as investors priced in the risk of Britain failing to agree a trade deal with the European Union in the 11 months left of the Brexit transition period.

But having dipped in early Monday trade to a 2-1/2 month low of $1.2873, sterling rebounded to as much as $1.2946 before inching down again to $1.2919 by 1700 GMT, a quarter percent firmer on the day.

The pound was 0.6% stronger against the euro at 84.48 pence.

"Sterling is back where it was at the beginning of December.

Since the negotiation mandates were released, all they have done is shown how far apart the two sides are and how hard the red lines are," said Chris Graham, senior Europe economist at Standard Chartered.

While analysts say the pound's direction will be determined by how economic growth shapes up, fourth-quarter growth and December industrial production data due on Tuesday won't provide much insight into the period following the Dec. 12 election.

Most indicators have suggested economic momentum has picked up since the election, but fears remain as Britain and the EU need to strike a deal before the end of the year to avoid a potentially disruptive break in trading relations.

"In the UK, recent data points to a pick up in growth which is good for the pound but that is being set off by concern over a trade deal," said Lee Hardman, a currency analyst at MUFG.

Positioning data from the US Commodity Futures Trading Commission released on Friday, meanwhile, showed speculators' bullish bets on sterling moderated further in the week to Feb. 4, but the market continued to hold a net long position.