The British pound went up against the dollar and euro on Tuesday after Prime Minister Boris Johnson warned that further measures may be needed after a rebound in global risk appetite.
The pound dropped to as low as $1.3175 on Monday because of fears about the spread of the Omicron coronavirus variant, possible lockdowns in Europe, and U.S. President Joe Biden's fiscal spending plans.
The pound bounced back in line with other risk-sensitive currencies as the move reversed on Tuesday. It was up 0.3% at 1215 GMT, at $1.3248, having erased its gains from when it went to $1.33755 after the Bank of England raised rates last week.
It was up 0.2% against the euro, at 85.21 pence per euro.
Johnson said on Monday that he would take further action to limit the spread of the Omicron variant if needed, describing the situation as extremely difficult British media said ministers had pushed back against the prospect of new restrictions before Christmas.
The government may decide to impose new restrictions on the GBP around Christmas due to the fast spread of the Omicron variant in the UK, wrote ING FX strategists in a client note.
The figures show that British public borrowing nearly halved in the first eight months of the 2021-22 financial year compared with a year earlier in the year when finance minister Rishi Sunak was deep in his emergency pandemic spending programme, so investors may still have short positions on the pound, which could help limit its losses.
Bethany Beckett, UK economist at Capital Economics said that the economy has got better at coping with restrictions with each new wave, but we still suspect it will cause a deterioration of public finances due to lower tax revenues and the potential reintroduction of government support schemes.
Sunak is under pressure to come up with new support for the hospitality industry, and other affected sectors because of the Omicron infections. Sunak is expected to say more about this soon, according to a UK minister.
According to the Confederation of British Industry, British retail sales growth fell sharply in the first half of December.
A business confidence survey showed that British businesses started to feel the impact of the Omicron variant this month.