By Harry Robertson
LONDON (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%.
Yet the U.S. currency gave up some of the previous day's gains against its major peers on Tuesday, with sterling rising 0.48% to $1.187.
"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 euro slipped 0.17% against the pound to 86.46 pence on Tuesday, after rising earlier in the session.
"The sterling gains are probably more a reflection of risk appetite in the markets than anything domestic," said Craig Erlam, senior market analyst at currency trading platform Oanda.
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.
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.
Also on Tuesday the Organisation for Economic Co-operation and Development (OECD) predicted Britain's economy would shrink 0.4% next year after expanding 4.4% in 2022.
Currency traders will 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.
(Reporting by Harry Robertson; Editing by Devika Syamnath and Shounak Dasgupta)