The pound traded steadily on Wednesday (26 October), recovering from the two-week low against the dollar it suffered in the previous session, despite warnings of an even bleaker future ahead.

By early afternoon, sterling was 0.18% higher against the dollar, exchanging hands at $1.2209, but slid 0.08% against the euro, trading at €1.1182.

The UK currency had touched its lowest level in two weeks on Tuesday, falling below $1.21 after the Chancellor Philip Hammond suggested the government remains open to the Bank of England (BoE) expanding its quantitative easing measures in future.

The drop, however, was partly reversed after BoE Governor Mark Carney told the House of Lords that Britain's central bank would take the pound's weakness into consideration at next week's policy meeting and that it would not be overly eager to tolerate an inflation overshoot.

"With the pound already incredibly low by historical standards, the prospect of cost-push inflation, coupled with a global trend of rising CPI readings, it is unlikely we will see the BoE implement any new easing measures for the foreseeable future," said Joshua Mahony, market analyst at IG.

Meanwhile, UBS Wealth Management warned that sterling could fall to between $1.10 and $1.20 if concerns over the future of the UK's trade relationships are allowed to linger on.

"We expect the UK economy to bear the brunt of Brexit uncertainty in the coming months, levelling out as we move further into next year," said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.

Mark Carney says BoE will not take instruction on policies ‘from the political side’
Mark Carney told the House of Lords that Britain's central bank would take the pound's weakness into consideration at next week's policy meeting Reuters

"Though the pound should recover accordingly, we cannot underestimate the central role that politics has played in sterling's fate up until now."

UBS added the pound could also climb as high as $1.36, should the UK economy recover from the initial Brexit impact.

Elsewhere, there was a mixed bag of news for the dollar, whose recent rally seems to have petered out. The greenback was on the front foot against the yen and the Canadian dollar, gaining 0.12% and 0.13% respectively, to trade at ¥140.35 and CAD$1.3369.

However, the US currency fell 0.34% against the euro to €0.9155 and shed 0.31% against its Australian counterpart, trading at AUD$1.3031, after the latter was boosted by better-than-expected third-quarter inflation figures.

According to the Australian Bureau of Statistics, CPI rose by 0.7% in the third quarter compared to 0.4% in the previous three months, while on a year-over-year basis, CPI rose to 1.5%. Both measures of inflation topped expectations eased expectations the Reserve Bank of Australia might cut interest rates next week.

However, Fawad Razaqzada, market analyst at Forex.com, warned the Australian dollar could weaken nonetheless.

"Investors may started to dislike the Australian dollar and other risk assets in general, due to concerns over US elections, the release of some disappointing corporate earnings or if commodity prices tumble on the back of a rebound in US dollar," he said.