Global financial market turmoil and fears about the strength of the UK economy sparked a sell-off which saw sterling shed nearly four per cent of its value in just two weeks.
But sentiment has brightened ahead of the Bank of England's interest rate decision and minutes on Thursday. Economists expect renewed concerns over the Chinese economy, choppy global markets and low oil prices means rate-setters will stay split 8-1 against an interest rate rise.
But analysts will be combing through the minutes for an insight into policymakers' thoughts on the potential effect of China's slowdown on global growth, as well as how this could impact inflation and growth in the UK. Governor Mark Carney recently said developments in China wouldn't affect the path of interest rates - yet the central bank is keeping an eye on this because it could add to deflationary pressures.
"Clearly, the increased concerns of a marked slowdown in China (with the likely knock-on effect on dampening growth elsewhere in Asia) and possible recurrent financial market turmoil do pose downside risks to UK growth," Howard Archer, chief economist at IHS, said.
"It is also likely to increase near-term disinflationary pressures for the UK through the downward impact on oil and commodity prices."
Against the dollar, the pound was up 0.76 per cent this afternoon.