LONDON: Sterling stemmed early losses on Wednesday on a more positive outlook over Brexit, overcoming data showing a shock slide in Britain's services sector and suggesting the economy would barely grow in the last quarter of 2018.
The pound traded well off the 17-month lows it hit on Tuesday, lifted by suggestions in some quarters that Britain may opt not to leave the European Union after all, although a looming vote on Brexit in parliament kept the gains in check.
Demand for the British currency has been sapped by investor uncertainty over the government's Brexit plans ahead of a March 29 deadline, making the pound one of the weakest performing major currencies this year.
The risks of Britain crashing out of the EU were seen to have fallen on Tuesday after parliamentary setbacks for Prime Minister Theresa May and an opinion from the European Court of Justice that Britain should be allowed to unilaterally revoke its departure notice.
Economists at JP Morgan reckon the odds of Britain staying in the EU have increased to 40 percent after the ECJ advisor's opinion, from 20 percent previously
The pound traded 0.1 percent lower at $1.2728, above an Asian session low of $1.2672 and moving further above a June 2017 low of $1.2659 hit in the previous session.
Against the euro, the pound was 0.1 percent stronger at 89.06 pence.
"Beyond the blows of defeat to the Prime Minister in the House of Commons yesterday, news from the European Court of Justice that the UK could unilaterally reverse Article 50 makes a no-Brexit a more realistic option," Silvia Dall'Angelo, a senior economist at Hermes Investment Management said.
Britain's parliament is debating the proposed Brexit deal but is widely expected to vote it down on Dec. 11. However, a vote in parliament on Tuesday handed more power to lawmakers over the next Brexit steps if the vote fails.
Despite this, traders were wary of taking big bets.
The pound and the British stock market top the list of bearish bets among global investors due to Brexit concerns though that could lead to a big snap back if an orderly Brexit or no-Brexit are the outcome.
"Parliament will want to have a deal before they leave and if nothing is agreed before Brexit date at end-March they will have to extend or revoke Article 50," a trader said, referring to the section of the EU treaty codifying departure from the bloc.
Currency derivative markets painted a picture of relative calm on Wednesday with investors broadly sidelined despite the weak services data.
The IHS Markit/CIPS UK Services Purchasing Managers' Index (PMI) fell to 50.4 from 52.2 in October, the weakest reading since just after the 2016 Brexit vote and below all forecasts in a Reuters poll of economists.
London's main FTSE index fell more than one percent but the more domestically focused FTSE 250 was down less, falling 0.2 percent.