LONDON: Sterling clawed back some ground against the euro on Wednesday, recovering from a two-week low, as a perception that political risk had faded drove investors to buy the pound after taking their bets against it to record levels.
The pound recorded its biggest one-day losses against the euro since January on Monday, as the single currency surged across the board on relief over market-favoured Emmanuel Macron's victory in the first round of French presidential elections, and sterling extended those falls on Tuesday.
But as the euro fell broadly on Wednesday on caution ahead of the European Central Bank's policy meeting on Thursday, investors took the opportunity to buy back the pound.
Positioning data shows bets against the currency remain close to record highs, though they were trimmed last week after British Prime Minister Theresa May called a snap election for June, with markets seeing the election as likely to bolster political stability as Britain exits the European Union.
The June vote, as well as a reduction of political risk in Europe more broadly on the view that Macron will easily beat far-right rival Marine Le Pen in the second round of the French election, had made investors more positive on the pound, UBS Wealth Management currency strategist Geoffrey Yu.
"We have to acknowledge that sterling is still one of the most underpositioned currencies in the market right now, and with this recovery in European risk appetite, with more stability in France and the UK, that has given an opportunity for people to get positions back in," he said.
"On a comparative basis, if you were to choose which currency was more underpositioned, euro or sterling, you'd take sterling any day."
Sterling was half a percent higher against the euro by 1530 GMT at 84.69 pence, having hit a two-week low of 85.30 pence on Tuesday.
Against the dollar, the pound was flat at $1.2840.
Investors are eyeing gross domestic product numbers due on Friday for clues on the state of Britain's economy, and are also on the lookout for more news on Brexit.
"The first phase of negotiations with the EU will be marked by sharp discord that is likely to be negative for the pound (and euro)," BMO Capital Markets currency strategist, Stephen Gallo, said.
The pound surged by as much as 4 US cents on May's election announcement last week, but its failure to push on since points to the doubts that remain in the market about the outlook for the currency and the UK economy in the months ahead.
Deutsche Bank revised up its sterling forecasts last week and said that the election decision might be a "game-changer" for the pound, down 20 percent against the dollar since the Brexit vote last June.
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