Sterling rises off lows but Brexit fears cap gains

LONDON (Reuters) - The British pound rebounded on Tuesday to hold above recent lows, although it remained vulnerable as traders still worry that Britain is headed for a no-deal Brexit.

Sterling hit a new, almost two-year low against the euro overnight, with the losses largely down to strength in the single currency rather than more Brexit-related worries.

The Guardian newspaper reported late on Monday that Brussels diplomats, briefed after a meeting with British Prime Minister Boris Johnson's chief European envoy, said it was clear Johnson had no intention of renegotiating the withdrawal agreement.

Johnson has said Britain will leave the European Union on Oct. 31 with or without a deal.

Michael Gove, the British minister responsible for planning for a no-deal Brexit, said he was saddened the European Union was refusing to reopen discussions on a divorce deal. Britain remained open to renegotiating, he said.

But markets believe the risk of a no-deal Brexit in October has surged in recent weeks under Johnson, and such fears have hammered the pound to its lowest in more than two years.

On Tuesday, sterling rose 0.3% against the dollar to $1.2175 <GBP=D3>, away from the 31-month low of $1.2080 hit last week. It had climbed as high as $1.2209 earlier in the session when the dollar sold off.

Against the euro the pound recovered from a nearly 2-year low of 92.49 pence <EURGBP=D3> to touch 91.94 pence, up 0.3% on the day.

"In the run-up to the Brexit deadline at end-October, we expect EUR/GBP to remain volatile and maybe more so than we previously thought likely. Financial markets are taking Boris Johnson's direct approach literally and, in the run-up to October, this could mean EUR/GBP will drift higher," Danske Bank analysts said, predicting euro/sterling could go to 97 pence.

"Our base case continues to be a much, much less dramatic outcome at the end of October. We expect EUR/GBP to settle at 0.89-0.91 (89 to 91 pence per euro) on the back of an extension and/or snap election," they added.

(Reporting by Tommy Wilkes; Editing by Angus MacSwan and Hugh Lawson)