The British pound flirted with a three-month low on Tuesday, hit by fears that Prime Minister Theresa May's speech later in the day is likely to set Britain on a course that would end its access to the lucrative European Union single market.

Concerns over US President-elect Donald Trump's protectionist policies are also undermining risk sentiment, helping to push up the yen back to its highest levels in more than five weeks.

The pound was on the defensive at $1.2045, having slumped to a three-month low of $1.1983 on Monday, which was its weakest point in more than three decades barring the several minutes in early Asian trade on Oct 7 when it tanked to as low as $1.1491.

Against the euro, the pound hit a 10-week low of 88.53 pence per euro on Monday before edging back to 88.06.Against the yen, sterling hit an eight-week low of 136.81 on Monday.

May will say Britain will not seek a Brexit deal that leaves it “half in, half out” of the European Union, according to her office, in a speech setting out her 12 priorities for upcoming divorce talks with the bloc.

Those priorities will include leaving the EU's single market and regaining full control of Britain's borders, several newspapers have reported.

Wary of possible swings in the pound after May's speech, sterling options are pricing in implied volatilities of22.25/36.65 per cent, about 2-3 times larger than most days.

“It's been reported that she is putting border control over the EU market, so that could lead to a 'hard Brexit',” said Shinichiro Kadota, senior FX&rates strategist at Barclays.

“Given the high uncertainty, the pound's volatility will be elevated in the near term, although in the mid- to longer-term,we are not that bearish on the pound because its valuations are so cheap if you look at its real effective rates,” he added.

The Bank of England's index of sterling has fallen over 14 percent since the referendum on Brexit last year, and stood not far from its record low.

The dollar slipped to 113.61 yen on Monday, hitting its lowest level in more than five weeks, as Trump's protectionist comments rattled some investors.

It last stood at 114.05 yen, down 0.1 percent on the day.

Trump's plans to cut taxes and raise infrastructure spending had boosted the dollar, helping to lift the currency to a10-month high of 118.66 yen in December and pushing down the euro to 14-year low of $1.0340 early this year.

The International Monetary Fund also said on Monday the US economy would grow faster than previously expected in 2017 and2018 based on the incoming Trump administration's tax and spending plans.

Yet Trump's protectionist rhetoric this month, including attacks on carmakers that export cars to the U.S. from Mexico,had many investors worried.

“Initially the markets took Trump's protectionist rhetoric as bluff. But looking at the line-up of his advisers and his news conference, it's increasingly clear that he is serious,"Barclays' Kadota said.

The uncertainty over Trump's economic policies is making it difficult for many market players to take long-term positions ahead of his inauguration on Friday.

“The medium-term picture is so unclear. People are only doing day-trading,” said a trader at a Western bank.

The euro changed hands at $1.0600, capped for now by its 55-day moving average, which stood at $1.0631 on Tuesday.

German economic sentiment data due at 1000 GMT could attract some attention.

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