Illustration photo of British Pound Sterling and U.S. Dollar notes
British Pound Sterling and U.S. Dollar notes are seen in this June 22, 2017 illustration photo. Reuters

The pound rose on Tuesday after falling in the previous session, as the dollar retreated following three days of gains.

The greenback - typically the driver of global currency markets - rose sharply on Monday as a jump in COVID-19 cases in China sparked growth fears and sent investors towards the safe-haven currency, causing the pound to drop 0.59%.

Still, the U.S. currency was down against its major peers on Tuesday, with sterling rising 0.33% to $1.185.

"The general picture is the dollar is just drifting a little bit lower after having a fairly strong rally yesterday, in the absence of any real news overnight," said Adam Cole, head of FX strategy at RBC Capital Markets.

The pound has rallied sharply in recent weeks after touching a record low of $1.0327 in September, when the government unveiled plans for large unfunded tax cuts.

New finance minister Jeremy Hunt last week pledged to raise taxes and cut spending in an effort to bolster public finances and restore market credibility, despite Britain sliding into a recession.

The euro rose 0.11% against the pound to 86.7 pence on Tuesday.

It was little changed after the Organisation for Economic Co-operation and Development (OECD) predicted Britain's economy would shrink 0.4% next year after expanding 4.4% in 2023.

Data on Tuesday showed the British government borrowed less than expected in October, although the budget deficit is likely to surge in the coming months due to energy support measures and an economic slowdown.

Sterling traders will keep an eye on testimony from Richard Hughes, the head of Britain's Office for Budget Responsibility, who will speak to the Parliament's Treasury Committee on Tuesday.

Traders will also scrutinise speeches from U.S. Federal Reserve officials due on Tuesday, ahead of Wednesday's release of minutes from the last Fed meeting.

A large part of the rally in sterling has been driven by a fall in the dollar, with a cooling in U.S. inflation driving hopes that the Fed might slow down on its aggressive rate hikes.

RBC's Cole said he expects the pound to drop to $1.04 in the coming months due to the weakness of the British economy.

"I think it's more of a grind lower from here, rather than the sort of explosive losses we saw back in September," he said.