Sterling gained slightly against the dollar and euro on Wednesday, helped by a report that Britain will propose a new solution for the Irish border dispute holding up Brexit talks.
End-of-quarter flows by global asset and fund managers rebalancing their portfolios can distort markets, analysts said, cautioning that investors should not read too much into moves in the final days of March.
The pound suffered its worst daily loss in three weeks versus the dollar on Tuesday after expectations of selling pressure from a large corporate healthcare deal prompted investors to take profits following a recent rally in sterling.
On Wednesday, the British currency recovered marginally, gaining 0.1 percent to $1.4171 but off the day's highs of $1.42.
Against the euro the pound rose 0.1 percent to 87.515 pence per euro.
"On the negotiations a lot of the good news is already discounted but the possible Irish border proposal edged sterling higher. I think we will need further positive news to move it above the $1.42 area," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
Irish officials have been told to expect new proposals imminently from Britain on how it plans to avoid a post-Brexit hard border, The Times newspaper reported on Wednesday, citing unidentified sources.
Britain and the EU agreed a Brexit transition deal last week that will buy both sides 21 more months to decide on their future arrangements after the UK leaves the trading bloc, but what to do about the Irish border remains unresolved.
Both Britain and the European Union say they do not want to go back to border checks between the Republic of Ireland and Northern Ireland.
More broadly, volatile equity markets in recent weeks could be bad news for the pound after its recent rally.
"The sell-off we're seeing in global equity markets poses some risks for the pound since the UK's credit account deficit makes it more sensitive to less favorable external conditions," said MUFG currency strategist Lee Hardman.
But Hardman said volatility in FX markets remained subdued and was not matching the turbulence seen in global equity markets.
Sterling has risen five percent against the dollar this year amid a broader sell-off in the U.S. currency. The pound has also gained 1.5 percent in value versus the euro