Jitters about austerity and a potential exit from the European Union (EU) mean a feel-good factor that lifted Britain's currency after a general election less than two weeks ago has quickly faded.
The election on May 7 delivered the first outright majority for the ruling Conservative Party in 23 years, bringing stability and certainty where analysts had predicted a hung parliament with no one party winning an overall majority of seats.
This unexpected outcome helped sterling to put in its best performance in six years against the dollar in the past two weeks, according to data from Thomson Reuters.
"The feel-good factor has been helping sterling but it's fair to say that the reality for sterling in the next few months will be dominated by two topics," Rabobank Senior Currency Strategist Jane Foley told CNBC on Monday.
"These are the EU referendum and the likelihood that fiscal austerity could become more of a tangible headwind to growth in the months ahead," she added.