Sterling hit by US dollar strength and Scottish independence talk
Sterling slumped on Monday as US dollar strength and suggestions that Scotland would vote for independence chipped away at the British currency.
The pound fell as much as 0.8% against the US dollar to 1.23 before bouncing to 1.241 in afternoon trading.
The slight recovery came after Prime Minister Theresa May suggested the UK could continue to pay into the EU budget after Brexit, provided the funds "give value for money and meet UK Government objectives".
Neil Wilson, a senior market analyst at ETX Capital, said: "Her soft Brexit message seemed to reassure markets that the UK economy is not heading towards the much-feared cliff edge and that has put a bit of a floor under cable for the moment."
Against the euro, sterling was down 0.5% at 1.188.
Meanwhile, the FTSE 100 closed marginally higher by 5.52 points at 7017.16.
The pound was otherwise feeling pain from a climbing US dollar, as investors continued to hold out hope for fiscal stimulus from President-elect Donald Trump and further rate hikes from the US Federal Reserve.
The possibility of Scottish independence from the UK also weighed on the currency after former first minister Alex Salmond suggested the Yes side would win a future referendum if the UK Government was determined to "sever" Scotland's European links.
Mr Wilson said: "That harder line on a second independence referendum for Scotland makes the outcome of the Brexit negotiations all the more crucial for the pound.
"Meanwhile we've also had pressure on sterling after a note from Deutsche Bank this morning said the pound looks expensive when set against the cocktail of political risks and diverging interest rates."
Across Europe, the French Cac 40 closed lower by 0.2% and German Dax closed higher by 0.2%.
In oil markets, Brent crude was down 0.6% at 54.93 US dollars (£44.23) as the strong dollar muted gains. A stronger US currency tends to make the dollar-denominated resource more expensive for international investors.
In UK stocks, Royal Dutch Shell's B shares were up 15.5p at 2,304.5p after the oil major reported it had sold a 31.2% stake in Japan's Showa Shell Sekiyu for 1.4 billion US dollars (£1.2 billion).
Shares in BP rose 1.1p to 490.8p after the company said it would inject almost 1 billion US dollars (£800 million) into a gas field off the coast of west Africa as the industry continues to battle low energy prices.
The deal will see BP pick up a 62% stake in Kosmos Energy's Mauritanian operation and 32.5% of its Senegalese unit.
Speedy Hire shares rose 2p to 54p on news that it has snapped up Midlands equipment firm Lloyds British Testing out of administration, and would take on 200 Lloyds staff through the deal.
The biggest risers on the FTSE 100 were Hikma Pharmaceuticals up 69p at 1,861p, Reckitt Benckiser up 180p at 6,794p, Randgold Resources up 130p at 5,705p, and Capita up 10.9p at 501p.
The biggest fallers were Ashtead Group down 77p at 1,534p, Standard Chartered down 19.3p at 665.7p, Barclays down 6.1p at 222.05p, and AstraZeneca down 97.5p at 4,303.5p.