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LONDON (Reuters) - Sterling sank to a 1-1/2 month low against a broadly stronger euro on Tuesday and steadied below $1.30, shrugging off a bout of selling into a bounce following strong UK inflation numbers.
After data showed inflation rose more than expected to 2.7 percent in April, the pound hit an almost one-week high against the dollar before a surge of selling soon after pushed it to $1.2865. By afternoon, sterling had recovered its losses to trade largely unchanged on the day, up just 0.1 percent at $1.2909.
Alejandro Zambrano, chief markets analyst at Amana Capital put the pound's immediate bounce after the data down to some traders buying the currency on the assumption the Bank of England may in a few months depart from its stance of looking through price rises and keeping interest rates steady.
But the pound's more than half-cent fall thereafter reflected a conviction in the market that sterling will struggle to top $1.30 this year given the scale of concern over Brexit negotiations with the European Union, traders said.
By 1600 GMT, sterling had sunk as much as 0.8 percent to 85.95 pence per euro, its lowest level since March 31, as investors bought broadly into the single currency.
"(This morning's moves) have shown there is a little more pain left in the euro short trade," said Stephen Gallo, an FX strategist with Bank of Montreal in London.
Investors have also tended to read the rise in inflation as purely the consequence of the pound's falls since last June's referendum vote to leave the EU, and more likely to weigh on consumer sentiment than spur a rise in official BoE rates.
While inflation has been strong, there have been intermittent signs in activity and other data that UK consumers, the drivers of a relatively robust economic performance in the past year, are beginning to feel more pain.
One assumption in last week's BoE's inflation report that investors questioned was that wage growth would take off more convincingly over the next two years -- something it has consistently failed to do since 2008.
"Wages have been stubbornly low since the (financial) crisis. Productivity gains are non-existent at times, or at least disappointing," said Nomura currency strategist Jordan Rochester.
"Tomorrow the risk is that you have a strong wage number and the market gets long sterling again. But if it's not strong tomorrow then I think sterling bulls will be calling a timeout for the time being.
Wages and other labour data are due on Wednesday. Retail sales numbers for April are on Thursday.
Writing by Patrick Graham; Editing by Catherine Evans