Declines in underlying measures of price growth that are being closely watched by the central bank also dropped, lending weight to signals from the BoE that inflation could have peaked. The pound fell 0.8% to $1.2078 against a broadly stronger dollar, retreating from near two-week highs and heading for its sharpest one-day decline this month. It had fallen as much as 0.9% to $1.20685 during the session.
The euro-sterling pair jumped 0.7% to 88.75 pence after losing more the 1% over the last seven sessions.
"While the risk of a sharp recession may have lessened, the easing in price pressures may persuade the Bank of England to take a slightly less hawkish approach at upcoming MPC meetings," Matthew Ryan, head of market strategy at payments and FX company Ebury, said.
"Swap markets now see just two more 25bp rate hikes from the BoE, with a 50/50 chance of a first rate cut by year end. This is less aggressive than expected from both the U.S. Federal Reserve and the European Central Bank, which could present some near-term downside for the pound against its major peers," he said.
The BoE delivered its 10th straight interest rate hike earlier this month, raising rates by 50 basis points to 4.0%, and suggested a peak in rates may be in sight - a relief for the economy that recorded zero growth in the last quarter of 2022.
BoE rate-setters have since provided mixed signals, with some, including Jonathan Haskel and Catherine Mann urging tighter policy.
"A key risk against lower UK inflation is the tightness of the labour market and the power of unions to force through higher wage increases amid strikes," Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners, said. On Tuesday, U.S. consumer price data briefly knocked the U.S. currency , before it recovered as investors concluded U.S. interest rates will stay higher for longer as inflation remained sticky. British politics was also at the forefront of investors' minds, after Scotland's First Minister Nicola Sturgeon announced plans to resign.
"In theory, Sturgeon resigning should be sterling-supportive, as her resignation removes an ardent supporter of independence," Stuart Cole, macro economist at Equiti Capital said.
"But the market will also be wanting to see who replaces her before deciding if any boost to sterling sentiment is merely transitory," Cole added, saying that a leader who might put renewed energy into a push for a referendum would potentially be negative for the pound.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: World FX rates in 2022 Graphic: Trade-weighted sterling since Brexit vote ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Susan Mathew and Samuel Indyk; editing by Barbara Lewis)
