Sterling fell to its lowest since mid-November against the euro and rose against a weakening dollar after data showed the British economy contracted slightly more than expected.
Economic output fell by 0.3% during the July-September quarter, compared with a previous estimate of 0.2%.
Analysts see mainly downside risks for the pound from now to year-end as the British economy remains stuck in a stagflationary environment while the data calendar is light.
Sterling fell 0.2% to 87.99 pence per euro, its lowest level since Nov. 15.
It had risen 0.1% to $1.2095 after hitting its lowest level since Dec. 1 at $1.2056 on Wednesday.
“We continue to see scope for EUR/GBP to move higher with a possible more marked divergence in policy actions from the European Central Bank and the Bank of England emerging next year,” said Derek Halpenny, head of research, global markets EMEA & International Securities at MUFG Bank.
The ECB pledged last week to raise rates at a stable pace to fight inflation, while the BoE is supposed to be closer than the ECB to the end of its tightening cycle.
Higher rates tend to support currencies, but some analysts fear that BoE’s excessive monetary tightening might hurt the British economy and weaken the pound.
JP Morgan analysts mentioned sterling’s positive correlation with rates, adding that “the BoE still has one of the most difficult balancing acts to execute in G10.”
Central banks have to balance the need to fight inflation against risks of further deepening an economic slowdown.
Politics will also be in focus as a resolution with the EU over the Northern Ireland protocol could help define the relationship between the UK and the EU over the coming years.
“The UK political backdrop has been undeniably calmer since (prime minister) Rishi Sunak took the reins,” Jane Foley, senior forex strategist at Rabobank, said.
“Sunak’s low profile also means that there has been little new news recently on issues that have been overhanging the UK for months,” she said mentioning the Northern Ireland protocol.
More than three-quarters of British companies have reported that the trade agreement between the European Union and Britain has made it difficult for them to grow their business.
Sunak said last week he was hopeful of reaching a resolution to a long-running dispute with the European Union on changing post-Brexit trade rules for Northern Ireland. (Reporting by Stefano Rebaudo; Editing by Arun Koyyur)