LONDON: Sterling rose from a 5 1/2-year low to trade above $1.43 on Monday, after a torrid sell-off that saw investors reacting to an uncertain economic outlook for Britain.
Investors have pushed back to the middle of 2017 forecasts for an interest rate increase, as lacklustre data and falling oil prices bolster expectations that inflation will slow and the Bank of England will keep rates lower for longer.
In addition, growing worries about Britain's membership of the European Union have weighed on the pound, which has shed 8 percent against the dollar in the past six months. Prime Minister David Cameron has promised a referendum on membership by the end of 2017, but it may come as early as June this year.
Sterling was up 0.3 percent at $1.43, after falling to $1.4248 earlier in the London session, its lowest since mid-2010. It has lost nearly 4 percent since the start of the year, making it one of the worst performing major currencies.
Against the euro, sterling was better bid. The euro was down 0.6 percent at 76.11 pence, after rising 1.5 percent on Friday to a one-year high of 76.935 pence. On a trade-weighted basis, the pound was 87.9, having hit a one-year low on Friday.
"From an economic standpoint, the relentless pressure in commodity prices will drive inflation to fall to further dangerous levels, and this will also probably weigh on investor sentiment (towards the pound)," said Jameel Ahmad, chief market analyst at FXTM.
The spotlight this week is on British inflation, wages and jobs. Traders said although annual headline inflation and monthly core inflation may show a slight rise, investors are likely to stay away given the risks to the economy from the EU referendum.
Some currency investors are stepping up bets against the pound in the derivatives market on expectations the EU referendum will be held this summer.
Options market pricing shows a jump in the cost of hedging against volatility between six and nine months from now - a period many expect to cover the vote.
"Latest Brexit opinion polls show the 'no' vote on the rise, boosting the risks of a Brexit, which the FX markets will likely price in. We prefer to trade via higher euro/sterling, as weak risk appetite also supports this trade," Morgan Stanley said in a note.
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