Sterling on Wednesday rose off a 10-week low as investors turned their attention to a Bank of England monetary policy meeting on Thursday when it is expected to keep interest rates on hold and detail conditions necessary for policy tightening.
The pound has weakened 4 per cent in October as traders fret over the lack of progress in Britain's EU divorce talks on issues including the Irish border, less than five months before Brexit.
It sank on Tuesday to its lowest since mid-August against the dollar after credit rating agency Standard and Poor's said a no-deal Brexit would likely tip Britain into a recession that could last more than a year.
Wednesday brought some reprieve for the currency, however, with some traders preparing for more-hawkish-than-expected signals from the central bank.
"The BoE might well convey a surprisingly stoical position," said Neil Mellor, senior currency strategist at BNY Mellon.
"The bank appears intent upon managing growth in accordance with an economy subject to increased capacity constraints in an ageing cycle," he said.
The BoE's push to normalize policy in the face of significant risks to the British economy from Brexit has been a source of puzzlement for some investors.
"We have questioned whether the bank's primary motivation has been the accumulation of ammunition to counter any Brexit-related fall-out," WorldFirst head of FX strategy, Jeremy Cook said.
The pound on Wednesday rose 0.3 per cent versus a weaker dollar to $1.2753. It also gained ground the euro, rising 0.2 per cent to 89 pence.
Options pricing is pointing to increased concerns about the UK outlook heading into 2019, and mounting angst over Brexit means the market is no longer fully pricing-in an interest rate hike next year.
UK Prime Minister Theresa May will later in the day meet around 120 chief executives and international investors to discuss Brexit and the economy.
After initially being perceived as frosty towards business, May has sought to win its backing for her compromise plan to avoid a no-deal Brexit as she takes on critics in her own party.
(With inputs from agencies.)