By Ritvik Carvalho and Jemima Kelly
LONDON (Reuters) - Sterling fell from a three-week high against the dollar on Monday, on the news Prime Minister Theresa May will trigger Britain's divorce proceedings with the European Union on March 29, launching two years of negotiations.
May's government said her permanent envoy to the EU had informed European Council President Donald Tusk of the date when Britain intends to invoke Article 50 of the Lisbon Treaty - the mechanism for starting its departure from the bloc.
The pound , which had been up as much as a third of a percent against the dollar in London morning trade, reversed course, falling as low as $1.2335 before recovering to around $1.2350 by 1730 GMT, still down 0.4 percent on the day.
"Despite the fact it's a known quantity, we have to assume that the stark reality of exiting the European Union is hitting home," said Neil Wilson, an analyst at brokerage ETX Capital.
"Quite what has changed is hard to say, except a hard dose of grim reality... We’re now in for a long period of volatility for the pound and UK assets as the government embarks on protracted and hugely challenging Brexit negotiations," he added.
The pound fell around half a percent against the euro to trade at around 87 pence versus the single currency.
Sterling has lost nearly a fifth of its value against the dollar, and around 13 percent against the euro, since last June's shock Brexit vote, pressured by uncertainty over the terms of Britain's exit deal from the EU, along with a stream of data suggesting the UK economy may be headed for a slowdown.
The pound has also come under selling pressure amid calls for another Scottish independence referendum, as investors consider the increased uncertainty posed by a potential break up of the United Kingdom.
Data on Friday showed speculators had raised their bets against the British currency versus the U.S. dollar to record-highs in the week up to last Tuesday. [IMM/FX]
Some analysts are warning of the potential for traders to be forced out of those stretched short positions if the exchange rate moves against them, which could prompt volatility.
"It is of course true that the build-up in speculative shorts raises the potential for a violent short-squeeze," Goldman Sachs analyst Michael Cahill wrote in a note to clients.
"However, in the quiet data period ahead, that seems like less of a risk than normal, in no small part because Brexit-related uncertainty is unlikely to decline significantly anytime soon."
(Editing by Patrick Graham, Jemima Kelly, Ed Osmond and Pritha Sarkar)