Sterling edged up on Thursday, hitting its highest level of the week as investors paused their ramping-up of bets on the Bank of England cutting interest rates later this month.
The British currency fell sharply earlier this week after another BoE policymaker said he would vote for a rate cut unless economic data improved significantly. Weaker inflation data on Wednesday added to sterling's woes.
Money markets are pricing in a roughly 57% chance of a 25 basis point cut to rates in January, down from more than 60% on Wednesday.
Traders are now preparing for December retail sales data due on Friday, followed by purchasing managers' index (PMI) surveys next week. Evidence that Britain economy's failed to improve after the general election on Dec. 12 will likely raise expectations for a rate cut and knock sterling lower.
"Weaker inflation data yesterday has helped coax market expectations of a cut in interest rates at the end of the month to above 65% thus far, although PMI data on 24th will remain important ahead of the MPC (Monetary Policy Committee) meeting 30th Jan," JP Morgan analysts said in a research note.
The pound rose as much as 0.23% to $1.3068, while versus the euro it gained 0.4% at 85.19 pence.
"We recently raised our EUR/GBP profile on the back of heightened confidence in a BoE repricing and the possibility of renewed Brexit fears," Danske Bank said in a note. It predicted the pound would fall to 87 pence per euro in three months, 89 pence in six months and 84 pence in 12 months.
Also weighing on sterling sentiment are investor worries about Britain's ability to clinch a post-Brexit trade deal with the European Union following their divorce at the end of this month.
British Prime Minister Boris Johnson has said Dec. 31, 2020 is a hard deadline for the end of a transition period to negotiate that deal, a timeline many observers say is too ambitious and risks leaving the UK without an EU trade arrangement at all.
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