LONDON Sterling edged up on Thursday, recovering from its worst daily performance in two months on a trade-weighted basis, after weak industrial data and a parliamentary vote to stick to the British prime minister's Brexit timetable weighed on the currency.
British lawmakers backed Theresa May's plans to trigger the start of formal talks with other European Union members on leaving the bloc by the end of March on Wednesday, after she headed off a rebellion in her party over a lack of insight into the government's strategy to leave the EU.
May still faces obstacles - the High Court ruled last month that the government needs parliament's assent to invoke Article 50, the formal mechanism for starting Brexit talks. The government is challenging that ruling in the Supreme Court.
But the vote in favour of May's timetable disappointed those investors who had been hoping that Brexit would be delayed.
"Sterling was hit quite hard yesterday by a solidifying of expectations that we will get a (Brexit) vote by the end of March," said RBC Capital Markets currency strategist Adam Cole.
The pound was also hit on Wednesday by data showing falls in sterling since the EU referendum had failed to boost Britain's manufacturers in October as industrial output suffered its biggest monthly drop since 2012.
"Prior to the news yesterday we had been digesting nothing but upside surprises in the data, and markets had got themselves teed up for a softer exit scenario – wrongly, in my view," said Cole. "The data...are not building a very constructive launchpad for Q4 as a whole. So having had consistent upside data surprises in Q3, Q4 so far doesn’t look terribly encouraging."
Having fallen to as low as $1.2570 on Wednesday, sterling traded up half a percent on the day at $1.2697.
Against the euro, which was trading at three-week highs versus the dollar, sterling edged up 0.1 percent to 85.15 pence, leaving it close to a one-week low of 85.50 pence per euro hit on Wednesday.
The pound's moves against the European common currency were mainly being driven by uncertainty ahead of the conclusion of the European Central Bank's latest policy meeting later in the day, analysts said.
"We would expect the ECB to cushion hawkish elements of its decision with dovish language and vice versa," wrote BNP Paribas strategists in a research note. "We see modest upside risk for the euro given our base case expectation."
For a graphic on sterling and gilt yields click bit.ly/2dgAXn1
For a graphic on world FX rates in 2016 click tmsnrt.rs/2egbfVh
(Editing by Raissa Kasolowsky)