Sterling inches up after worst week against euro in 9 months

Sterling edged up against the euro on Monday, recovering from its worst week against the single currency in nine months and its lowest levels this year, as the euro dipped on weak German manufacturing data.

The pound lost more than 2.5 percent against the euro last week, hitting an eight-month low of 89.94 pence on Friday, as the single currency rallied on bets the European Central Bank would tighten monetary policy next year.

Though the pound had been supported in recent week by expectations that the Bank of England, too, would raise interest rates in the coming months, policymakers have made it clear that any tightening will be data-dependent.

Weak figures on the British economy last week, therefore, fed doubt that the BoE was getting close to raising rates.

Having reached a 10-month high of $1.3111 last week as the dollar weakened across the board on political worries and falling expectations of another rate hike from the U.S. Federal Reserve this year, sterling was trading flat at around $1.30 on Monday.

"The tone is very dollar-bearish at the moment, and the fact that cable (sterling/dollar) is actually marginally lower over the past week tells you a lot," said BNY Mellon currency strategist Neil Mellor.

"Politics seems to be the thing right now – it was underlying economic fundamentals but I think that's starting to sour," he added. "It will be very hard, in view of the data we've had of late, to really justify a further vote for a hike."

Data released late on Friday showed investors cut net short positions - or bets against sterling - to the lowest level since March 2016 in the week to last Tuesday, reflecting a souring of sentiment around the dollar as well as some optimism that the political situation in Britain could stabilise.

British trade minister Liam Fox said on Sunday that he backed a transition agreement to smooth Britain's departure from the European Union that Prime Minister Theresa May has proposed, but it would have to come to an end before the next election due in 2022.

"We still expect sterling/dollar to take one further leg up as investors price in the May government accepting a longer-term transition, or as PM May calls it the 'implementation phase,' which will reduce the cliff edge risk for 2019," wrote Morgan Stanley analysts in a note to clients.

"However, the next leg up...is for sale," they continued. "The economy seems headed for a sharp slowdown as investment and consumption both worsen simultaneously... Near $1.33, sterling will turn into a strategic sell."