LONDON Sterling's best run against the euro in over four months came to a low-key end on Tuesday as below-forecast British inflation data added to a handful of subdued signals coming from the economy in the past couple of weeks.
The figures still showed the fastest rise in consumer prices since June 2014, driven by sharply higher fuel prices, but the headline 1.8 percent year-on-year reading was short of the 1.9 percent increase expected by economists.
It was seen as doing little for the chances of an early rise in Britain's record low interest rates and knocked the pound, which on Monday had notched its first unbroken six-day run of gains against the euro since early September.
Sterling fell as much 0.7 percent to 85.18 pence per euro before clawing its way back to 84.82 pence as signals that U.S. interest rates should rise drove the euro backwards across FX markets.
The pound had already fallen 0.5 percent against the dollar at $1.2458 and it stayed there as the greenback rallied. That resistance meant it also made up lost ground against the Japanese yen to put it at 142.50 yen.
"The hawkish calls (for the Bank of England to raise interest rates) had been steadily growing in the background and as soon as the data hit there was a bit of a reality check for sterling," ING FX strategist Viraj Patel said.
"Focus now switches to the wages data tomorrow and if they don't pick up as much as inflation, food prices etc... Then the Bank of England will have to look through the inflation (rise) and focus on the slowdown in growth."
The political rumblings from Britain's looming divorce from the European Union also continued which kept UK government bonds under pressure.
Speaking in Sweden, British Brexit minister David Davis said Britain would not, as some media reports have suggested in recent weeks, launch the formal EU exit procedure before the bloc's leaders holds a summit on March 9-10.
Davis stuck to the previously-flagged end of March timeframe, meaning it could clash awkwardly with another EU summit on March 25 being held to celebrate the bloc's 60th anniversary.
"The 9th or 10th is not a date I recognise in terms of our timetable. What we have said is by the end of March, sometime during March," Davis said alongside Ann Linde, Sweden's minister for EU Affairs and Trade.
The inflation data meanwhile added to an increasingly complex outlook for Britain's economy, which up until now has been fending off economists worries surrounding Brexit.
Below the headline numbers, other data showed the prices paid by factories for fuel and materials rose at an annual rate of 20.5 percent, the biggest leap since 2008 and underscoring the pressures currently building on UK firms.
The cost of crude oil alone was more than 88 percent higher than a year earlier - the biggest increase since June 2000 - overwhelmingly driven by global rebound in prices. The 17 percent post-Brexit vote slump in the pound compounds that.
"The notion of Bank of England tightening policy is not implausible, but if we are right and the economy does slow to a growth rate of 1 percent, market pricing for rate hikes will continue to diminish." said JP Morgan strategist Paul Meggyesi
On the looming Brexit negotiations he added: "I don't buy the idea that the uncertainty risk premium has been removed by the progress in the government’s (Brexit) plans. It shouldn’t necessarily be seen in a positive light for sterling."
(Additional reporting by William Schomberg; editing by Richard Lough)