LONDON Sterling fell against the dollar and euro on Friday, retreating from the previous session's one-month highs, as investors braced for Britain beginning the formal process of leaving the European Union next week.
An interview with Bank of England policymaker Gertjan Vlieghe in The Times on Friday also laid out an argument for not raising interest rates in response to further rises in inflation.
Strong inflation and retail sales data have added to expectations the Bank of England might lean towards supporting sterling with higher interest rates over the next year, pushing the pound 1 percent higher against the dollar this week.
Investors, however, worry that when Prime Minister Theresa May begins formal divorce proceedings with the European Union next Wednesday, it may trigger a period of political jousting with Britain's EU partners that will lay bare the scale of the risks to the economy.
Sterling was 0.3 percent lower at $1.2493 by late afternoon trade in London and was 0.4 percent lower at 86.49 pence per euro.
"Uncertainty (surrounding Brexit) remains intact," said Credit Agricole currency strategist Manuel Oliveri.
"Rate expectations are unlikely to rise because the BoE is linking its monetary policy stance to this uncertainty, and that's why we don't believe sterling has more upside from current levels."
Since minutes from the Bank of England's meeting last week showed a number of monetary committee members close to voting for a rise in rates, signals from officials have been mixed.
Asked about Tuesday's inflation data, BoE governor Mark Carney said it was important not to overreact to a single data point.
Deputy Governor Ben Broadbent on Thursday said it was possible interest rates would rise, but also highlighted a strong sense of caution among investors about the outlook for Britain after Brexit.
Policymaker Vlieghe believes a rise in inflation to more than 3 percent might not prompt him to consider raising interest rates because the increase would probably be temporary, The Times reported.
As investors' eyes shift to events next week, the broad view among strategists is that the triggering of Article 50 is already priced into the pound.
"I can't see sterling collapsing on an event that we already know that's going to happen," said Jake Trask, corporate dealer at OFX.
"There might be possibly some upward movement on it just given the certainty that all the debate is over and we're actually going forward."
(Reporting by Ritvik Carvalho, editing by Larry King and Toby Davis)