LONDON: Sterling held broadly steady against the dollar on Tuesday, extending its gains from Monday after a dramatic fall last week, as a new round of Brexit talks on the horizon gave a cautious boost to investor optimism.
Britain enters the next stage of negotiations on its departure from the European Union on Thursday, with businesses and investors alike waiting for discussions to move on to the country's future trade relationship with the bloc.
Prime Minister Theresa May's government said on Tuesday it was about to submit legislation to parliament needed to let Britain pursue an independent trade policy once it leaves the EU.
The trade bill contains provisions to help Britain in its bid to convert existing EU free-trade agreements into British ones after it leaves the trading bloc, the government said.
"The market is currently pricing in a transitional (Brexit) deal into FX, and a transitional deal results in things being OK for the pound," said Sam Lynton-Brown, a currency strategist at BNP Paribas in London.
"But this highlights a vulnerability. If market sentiment shifts, if the market starts to price in a 'no deal' scenario, it's likely to weigh on sterling," he added.
Sterling was down 0.2 percent against the dollar on Tuesday, trading at $1.3150, offsetting meagre gains eked out on Monday.
Against the euro, the pound held steady at 88 pence, despite the single currency hitting a 3-1/2-month low against the dollar.
Despite this modest rebound, uncertainties around the ability of Britain's Conservative government to lead the country towards a strong Brexit deal continue to weigh on the pound.
Investors are watching for any clues on the health of the UK economy which may affect the Bank of England's plans for future interest rate rises following a historic rate hike last week.
A survey by the British Retail Consortium on Tuesday showed retail spending fall last month at the fastest pace since 2008.
But figures from mortgage lender Halifax on Tuesday showed house prices rising in the three months to October at their fastest pace since February, in line with market expectations.
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