The pound reclaimed some lost ground against a weakening euro on Wednesday, a day after plunging following weak data and ahead of the expected release of a report into lockdown-breaking parties at Downing Street.
Senior civil servant Sue Gray is expected to publish the report on Wednesday, heaping more pressure on Prime Minister Boris Johnson as the country struggles with a slowing economy and decades-high inflation.
Data on Tuesday showed a sharp slowdown in British business activity in May, with S&P Global's flash Composite Purchasing Managers' Index slumping to a 15-month low, adding to fears that the economy will slip into recession.
"Fears about the fragility of the UK economy look set to keep sterling under pressure after the much weaker than expected PMI data," said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown in an email.
Traders scaled back expectations for interest rate hikes from the Bank of England (BoE) following Tuesday's data, with money markets now pricing in around 120 basis points of tightening by year-end.
BoE Chief Economist Huw Pill said, in an interview published on Wednesday, he thought more tightening was needed but not necessarily to a "super restrictive" stance.
At 0814 GMT, the pound was flat against the dollar at $1.2532.
Against the euro, sterling was up 0.5% at 85.17 pence, regaining some ground as the euro weakened following comments from European Central Bank board member Fabio Panetta.
"Normalisation should not be equated with getting interest rates back to a neutral setting," Panetta said on Wednesday, challenging a view presented by other ECB policymakers including President Christine Lagarde.