Sterling on Friday held onto the gains of previous day helped by reports the British government will reverse more of its controversial mini-budget, expectations reinforced by finance minister Kwasi Kwarteng's early return from a trip to Washington.
The pound was last at $1.1332, down 0.38 per cent on the day after having jumped over 2 per cent on Thursday, with a weakening in the dollar also a factor. The euro was up 0.22 per cent against the pound at 86.43 pence, having shed 1.3 per cent the previous day.
The British currency gained as reports circulated on Thursday that prime minister Liz Truss was weighing a U-turn on elements of the plan Kwarteng announced three weeks ago that triggered turmoil in financial markets, and sent yields on British government bonds soaring and the pound to a record low against the dollar of $1.0327.
"The pound is pricing the expectation of another significant policy U-turn from the government, that they will have to give way to the pressure from the market and reverse the bulk of the tax cuts," said Lee Hardman, senior currency analyst at MUFG.
Kwarteng left a gathering of global finance ministers early, and sources told Reuters he would join colleagues looking at how to balance the books for his fiscal plan.
The reports of the U-turn also drove gilt prices sharply higher.
Hardman said with the U-turn already in the price he saw little chance of much further gains for sterling from these levels, as "the bigger picture is ultimately still that the pound is vulnerable to further weakness" due to fears of the global slowdown.
Investors in Britain were also watching the Bank of England whose emergency bond buying programme is due to end on Friday. Bank officials have repeatedly said the programme will end as scheduled.
While further turmoil in the bond market could force the central bank to step back in, "If we get more announcements from the government or leaks that they will reverse more of the tax cuts, the selling pressure on gilts might easy anyway and mean less pressure for the Bank of England to come back," said Hardman.
