Sterling rose today after better-than-expected retail sales for Britain a day after finance minister Jeremy Hunt announced tax rises and spending cuts in an effort to reassure markets that the government was serious about fighting inflation.
Data today showed British retail sales staged a partial recovery in October, when inflation hit a 41-year high of 11.1%.
After a volatile session yesterday, sterling rose today to trade up 0.4% against the US dollar to $1.1914, not far from three-month high touched earlier this week.
Against the euro, sterling rose 0.5% at 86.98 pence, briefly touching its highest against the single currency in almost two weeks.
"As we look towards the end of the year, the pressure on the UK consumer is unlikely to diminish, although we could well see a pickup in retail sales spending in the lead-up to Christmas," said Michael Hewson, Chief Market Analyst at CMC Markets UK.
But overall traders continue to see downside risks for the pound.
"Following the tax raising measures announced in yesterday's Autumn budget, even today's modest rebound (in the pound) looks likely to prove short-lived, as households see their budgets eroded further courtesy of the government." said Stuart Cole, head macro economist at Equiti Capital in London.
Market research firm GfK data showed today that British consumer confidence ticked higher this month but remained close to record low levels, with soaring inflation and the spectre of recession making a sustained improvement unlikely.
UK money market futures pointed to the Bank of England raising interest rates to a peak of 4.65% by August next year, from 4.59% immediately before Hunt's remarks.