By Olga Cotaga
Sterling was dragged up by a weaker dollar and an improvement in risk sentiment on Wednesday, with analysts saying it was likely to face further weakening due to economic damage inflicted by the coronavirus crisis and Brexit.
The pound was up 0.5% at $1.2610, having risen to $1.2649, its highest since Monday.
Against the euro, sterling rose by 0.2% to 90.58 pence, a whisker off the two-week low of 91.12 it fell to the day before.
"From an FX perspective it is always about the relative, and we would argue that the relative macro position for the UK is looking grimmer than most other major economies. That will lead to further sterling weakness ahead," said Derek Halpenny, head of research at MUFG.
"With the Brexit impediment thrown in on top, sterling will increasingly be viewed as part of the solution in providing stimulus through further depreciation ahead," Halpenny added.
Talks on Britain's future relationship with the European Union will be a major topic of bloc business from September, but until now Britain has shown insufficient realism about what can be achieved, Germany's Europe Minister Michael Roth said.
After gross domestic product data for May rose by a smaller amount than expected, investors question whether the already announced fiscal stimulus measures will be enough to prop up the economy, expecting the Bank of England to increase its quantitative easing programme and lower interest rates further.
Britain's five-year government bond yields fell last week below zero and "more subdued recovery in the UK will see market rates go more negative over the coming weeks," Halpenny estimated.
Speculators are shorting the pound, with most recent CFTC positioning data showing that leveraged funds held $1.28 billion in shorts, though the amount had decreased in recent weeks and was not nearly as high as around the same time last year.
(Reporting by Olga Cotaga, Editing by William Maclean and Catherine Evans)