Sterling retreated from its highest since July against the euro and steadied off two-month peaks against the dollar on Monday, in trading dominated by a rebound for the single currency after Italy voted against constitutional reform in a referendum. The pound briefly hit its strongest since early October against the dollar in early London trade, extending one of the currency market's best runs over the past month.
But it fell 0.7 percent against a broadly stronger single currency to trade at 84.37 pence per euro, having earlier hit an almost five-month high. Nick D'Onofrio, chief executive with London-based hedge fund North Asset Management, said that Britain's huge current account deficit argued for substantial falls in the pound.
He said its strength in the past month looked chiefly due to a squaring-up of some of the huge bets on the currency built up earlier this year. With that over, it should be hit by concerns over Britain's planned exit from the European Union. "Sterling has just got to fall further, especially against the euro," he said. "(It should fall) at least 10 percent more. Below $1.15 is probably reasonable."
On the day, the pound lost 0.2 percent to $1.2705, having hit a high of $1.2742 in early trade in London. Dealers said most of the action had centred on volatile moves in the euro following the Italian vote, with importers tempted to buy euros they need to purchase goods from European producers as the single currency sank overnight before rebounding.
"It all happened in the middle of the night - we saw a full day's trading by 6 am (0600 GMT) but if you weren't in before then, you had missed it," corporate and consumer currency broker Moneycorp's chief executive Mark Horgan said. "We're mainly an import book, and we saw a lot of guys jumping on the chance to close out (when the euro was low)."
Sterling posted a fifth consecutive week of gains against the euro on Friday, its best run for nine months, as investors' fears eased over a "hard Brexit" that would see Britain lose access to the European Union's single market. A suggestion by Brexit minister David Davis that the government may be willing to pay into the EU budget in return for access to the bloc's single market also helped it towards levels around $1.30 that it held in August and September.
Many banks are still forecasting further falls in the next quarter around the launch of official talks on leaving the EU. That may depend partly on whether Britain's economy continues to hold up in the face of perceived risks to investment and corporate confidence from the process. Better-than-expected results from a monthly survey of service sector purchasing managers also pushed sterling a touch higher on Monday.
"It wasn't really enough to move the dial and it does seem like there is two-way interest again on sterling after that huge rise last week," a dealer with one large Asian bank in London said. "$1.27 will seem to some people like a very good level to get back into pound shorts (bets on it weakening)."
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