Sterling regains footing against weak dollar, tumbles versus euro

By Yadarisa Shabong

(Reuters) - Sterling rose against the dollar on Tuesday as fears of a U.S. recession drove traders away from the greenback, though the British currency was set for its seventh straight day of losses against the resurgent euro.

The pound rose 0.4% to $1.2931, building on its 2.7% gain last week, as worries about a tariff-led slowdown in U.S. economic growth drive traders away from the greenback.

Analysts said the move could continue in the coming days, though was unlikely to be sustained medium term.

Nick Rees, head of macro research at Monex Europe, said while U.S. recession fears were "overdone", currency markets "could be wrong for an extended period".

He expects the pound to fall against the dollar, but potentially not for a couple of weeks.

From the UK side, the week's focus will be on Britain's monthly gross domestic product due on Friday but until then analysts said the currency would largely be influenced by moves elsewhere.

The pound lost ground on the euro, which rose as high as 84.445 pence, its highest since late January, before paring some of its gains. It was last up 0.1% at 84.235 pence.

Optimism that a deal could be reached on a German defence spending package has lifted the common European currency as eurozone growth prospects have brightened.

The package, and reform of Germany's "debt brake" have also caused a sharp repricing of German government bonds, giving support to the euro.

The spread between German and UK 10-year yields was 5 basis points narrower on Tuesday, and the two-year yield spread was 2 bps tighter. Both are around their narrowest since late 2024.

(Reporting by Yadarisa Shabong in Bengaluru, editing by Ed Osmond)