Sterling had earlier in the day hit a one-week high against the greenback as inflation and encouraging economic data fuelled speculation the Bank of England (BoE) will act first among major global policymakers to raise rates for the first time since the COVID-19 pandemic struck early last year.

Those expectations were further bolstered by data on Tuesday showing Britain's job market had weathered the end of the government's furlough support scheme, easing a major worry about the risks of tightening monetary policy.

Investors remain wary about the timing of any move, however, after the BoE surprised markets earlier this month by keeping rates steady when many had understood the hike was coming.

At 1527 GMT sterling had slipped 0.41% versus the euro, against which it had hit a 21-month high on Wednesday after rising 2.4% in the last two weeks. It is now at 84.23 pence.

The pound was also down 0.1% against the dollar at $1.3481.

Sterling rises after UK jobs rise eases BoE's worries

While rate hike expectations support the pound for now, analysts at Citi said on Thursday there are longer term concerns for the currency amid wrangling between the European Union and Britain over the Northern Ireland part of the Brexit deal.

Relations between Brussels and London have soured in recent weeks after Britain, unhappy with the deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16, potentially leading to a trade war.

Such action could send sterling as low as $1.25, the Citi analysts warned, if the EU imposed tariffs in response.

Markets have been betting that the European Central Bank will fall behind in tightening policy even as rising inflation prompts others including the Federal Reserve to raise rates over the next 12 months.

Stronger-than-anticipated inflation numbers in the United States last month, as well as punchy retail sales data this week, have reinforced those bets.

The euro, which on Wednesday touched a 16-month low below $1.13, rose 0.2% to $1.1345 in European trading hours on Thursday.

The dollar index, which measures the currency against a basket of six rivals, reached its highest since mid-July 2020 on Wednesday at 96.226, but was last down 0.2% at 95.654.

"Our core view is that the dollar can continue its rally against the low yielders, but that these mid-cycle dollar gains should not stand in the way of some strong performance in the commodity FX space," ING analysts said in a note.

Other analysts said the dollar's robustness was not necessarily durable.

"The sustainability of the current dollar strength beyond the next few months looks far from certain," said Luc Luyet, FX strategist at Pictet Wealth Management.

Euro crumbles; traders wait on US consumer test

"Market expectations of the Fed are starting to be particularly hawkish, suggesting limited tailwinds for the U.S. dollar going forward from that factor."

The New Zealand dollar jumped 0.7% to $0.7049 after a central bank survey showed near-term inflation is expected to rise in the fourth quarter.

The day before, sterling rose 0.5% to a one-week high against the dollar after a rise in Britain's October inflation piled pressure on the Bank of England to hike rates at its meeting next month.

The British currency was last at $1.3493, unchanged on the day.

Elsewhere, Turkey's lira shed another 2.3% and headed towards 11 per dollar after the central bank cut rates by 100 basis points to 15%, even in the face of inflation near 20% and the Turkish currency hurtling southwards.

The lira has lost 11.5% of its value so far this month amid President Tayyip Erdogan's renewed criticism of interest rates and calls for stimulus despite the risks. It was last at 10.85, having hit a record low of 10.98 per dollar overnight.

Commodity-linked currencies were hurt by oil prices, which slumped to near six-week lows.

The Canadian dollar was at a six-week low. Markets are expecting the Bank of Canada to start raising interest rates early next year. The Norwegian Crown also fell.

The Australian dollar touched a six-week low of $0.7263 but later bounced back, aided by the Kiwi's rally and was last up 0.3% at $0.7290.

Fears of a slowdown in the job market, following the end of the furlough scheme on Sept. 30, prompted the BoE to surprise the market and keep rates on hold at its latest meeting, when sterling had its deepest fall versus the dollar in 14 months.

Sterling rose 0.5% versus the euro after data showed the number of staff on businesses' payrolls in Britain rose by 160,000 in October versus the month before to 29.3 million, 0.8% higher than in February 2020 before the pandemic hit, based on data from tax authorities.

"Tuesday's robust employment data may now renew confidence in an imminent hike by the Bank of England," said Joe Tuckey, FX analyst at Argentex. There is "cautious optimism that sterling may finally receive some much-needed uplift," he added.

At 1545 GMT, the pound was 0.3% higher against the single currency at 84.50 pence.

Versus a strengthening dollar, the pound was up 0.1% at $1.3426, erasing some of its earlier gains after data showed U.S. retail sales increased more than expected in October.

Sterling rises

The pound has recovered some ground this week after it dropped on Friday to its lowest against the dollar in 11 months.

Also supporting sterling, BoE Governor Andrew Bailey said that his vote to keep interest rates on hold earlier this month had been a very close call. The lack of official data about what had happened to workers who were still on furlough when the scheme ended had made him want to wait.

The BoE could be the first major central bank to raise interest rates, but whether that initial increase comes as soon as next month or early next year has divided economists polled by Reuters.

In the meantime, capping sterling gains, there are worries that disagreements between Britain and the European Union over Northern Ireland could trigger major trade disruption, hitting the British economy, which is lagging that of other rich nations.

At 1250 GMT, the rouble shed 1.1% to 73.33 against the dollar, its weakest since Sept. 21 apart from a seconds-long drop on the Moscow Exchange on Oct. 22 that was likely caused by a trading error.

Versus the euro, the rouble shed 1% to 83.18.

After hitting its strongest level since mid-2020 of 69.21 against the dollar in late October, the rouble came under selling pressure last week after a Bloomberg report said that U.S. officials had told EU counterparts about concerns over possible Russian military intervention in Ukraine.

Russia's risk measured by five-year credit default swaps that reflect the cost of insuring exposure to sovereign debt jumped to 99.2 basis points, their highest since April 22.

The Russian troop movements near the Ukrainian border have spurred fears of a possible attack. But Moscow has dismissed such suggestions as inflammatory and complained about increasing activity in the region by the NATO alliance.

Russia also came under the spotlight after it conducted an anti-satellite missile test that, as U.S. officials said, generated a debris field in low-Earth orbit that will pose a hazard to space activities for years.

Rouble recovers from steep losses, stocks up

Russia denied allegations by the United States, Britain and NATO that the test had been dangerous for orbiting spacecraft.

In the short term, the rouble may remain volatile in the range of 72-73 versus the dollar but it could win back the recent losses quickly if the political background stabilises, said Dmitry Polevoy, head of investment at Locko Invest.

The rouble is set to receive support from month-end taxes that boosts demand for the currency as well as from expectations of more interest rates hikes by the central bank.

Russian stock indexes gave up earlier gains and fell.

The dollar-denominated RTS index declined 1.2% to 1,770.8 points. The rouble-based MOEX Russian index was 0.5% lower at 4,113.9 points.

The dollar index held near its highest in 16 months, having rallied since U.S. inflation data last week showed consumer prices surged to their highest rate since 1990, fuelling speculation that the Federal Reserve may raise interest rates sooner than expected.

Investors are waiting for U.S. retail sales data due later in the session, which could also influence the outlook for interest rates.

At 1238 GMT, the dollar index was flat on the day at 95.541 .

The euro was flat versus the dollar at $1.1367. Earlier in the session dropped to $1.1352, its weakest since July 2020, extending recent losses on Monday after dovish comments from European Central Bank President Christine Lagarde. .

Lagarde said that tightening monetary policy now to rein in inflation could choke off the euro zone's recovery, comments which were viewed as pushing back on calls and market bets for tighter policy.

"Markets are still assuming that the ECB is in a very different position and latitude to the Fed, so that sort of rates-spread argument as well as concerns about the re-imposition of restrictions across the euro zone_ are just keeping the euro very much on the defensive," said Jeremy Stretch, head of G10 FX strategy at CIBC.

UniCredit strategists said in a note that "even if lower-than-consensus economic data are released this afternoon in the U.S., including retail sales and industrial production, we doubt that this is likely to alter the scenario now that selling EUR-USD into rally remains favoured."

Euro drops ahead of ECB meeting, yen looks past BOJ doves

On Monday, Austria imposed a lockdown on unvaccinated people, while Germany's parliament is due to vote on Thursday on stricter measures to deal with surging cases. France, the Netherlands and many countries in Eastern Europe are also experiencing a surge in infections.

"The fear that the situation could escalate and result in a more significant tightening of restrictions in the coming months is hurting sentiment towards European currencies," MUFG currency analyst Lee Hardman said in a client note.

U.S. President Joe Biden and Chinese leader Xi Jinping stressed their responsibility to the world to avoid conflict, in talks which gave Asian currencies a lift overnight. But support for riskier currencies ebbed somewhat as the talks did not appear to lead to any particular breakthrough.

The dollar hit a five-month low against China's offshore yuan overnight, at 6.3615, and was still down around 0.1% on the day at 1242 GMT, at 6.3877.

But the Australian dollar - seen as a liquid proxy for risk appetite - was down 0.1% at $0.73385.

The British pound was up 0.3% against the dollar at $1.3467, having risen after data showed British employers hired more people in October after the government's job-protecting furlough scheme ended.

The Swedish crown was up around 0.3% against the dollar at 8.789. Swedish headline inflation hit its fastest pace since 2008 in October, data on Monday showed.

"We assume that the Riksbank will call the rise in inflation temporary at its meeting next week," wrote Commerzbank FX and EM analyst You-Na Park-Heger in a client note.

Elsewhere, the cryptocurrency bitcoin fell back below $60,000, for the first time since November 1.

U.S. President Joe Biden and Chinese leader Xi Jinping stressed their responsibility to the world to avoid conflict, in talks which gave Asian currencies a lift overnight. But support for riskier currencies ebbed somewhat as the talks did not appear to lead to any particular breakthrough.

The dollar hit a five-month low against China's offshore yuan overnight, at 6.3615, and the pair was still down around 0.1% on the day at 0850 GMT, at 6.3767.

But the Australian dollar - seen as a liquid proxy for risk appetite - had lost its overnight gains by early European trading, down 0.1% on the day at $0.73425.

The dollar index was a touch lower at 95.446, having rallied to its highest in 16 months after U.S. inflation data last week showed consumer prices surged to their highest rate since 1990, fuelling speculation that the Federal Reserve may raise interest rates sooner than expected.

Investors are waiting for U.S. retail sales data due later in the session, which could also influence the outlook for interest rates.

The euro was little changed on the day, having extended recent losses on Monday after dovish comments from European Central Bank President Christine Lagarde.

Lagarde said that tightening monetary policy now to rein in inflation could choke off the euro zone's recovery, comments which were viewed as pushing back on calls and market bets for tighter policy.

Dollar holds firm ahead of US inflation data

"Even if lower-than-consensus economic data are released this afternoon in the U.S., including retail sales and industrial production, we doubt that this is likely to alter the scenario now that selling EUR-USD into rally remains favored," UniCredit strategists wrote in a client note.

Analysts also said that rising COVID-19 cases in Europe were hurting European currencies including the euro.

On Monday Austria imposed a lockdown on unvaccinated people, while Germany's parliament is due to vote on Thursday on stricter measures to deal with surging cases. France, the Netherlands and many countries in Eastern Europe are also experiencing a surge in infections.

"The fear that the situation could escalate and result in a more significant tightening of restrictions in the coming months is hurting sentiment towards European currencies," MUFG currency analyst Lee Hardman said in a client note.

The British pound was up 0.4% against the dollar at $1.3467, having risen after data showed British employers hired more people in October after the government's job-protecting furlough scheme ended.

The Swedish crown was up around 0.2% against the dollar at 8.789. Swedish headline inflation hit its fasted pace since 2008 in October, data on Monday showed.

"We assume that the Riksbank will call the rise in inflation temporary at its meeting next week," wrote Commerzbank FX and EM analyst You-Na Park-Heger in a client note.

Elsewhere, the cryptocurrency bitcoin was down around 4.5% on the day, at $60,750.

Relations between Brussels and London have deteriorated in recent weeks after Britain, unhappy with the Brexit deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16 of the Northern Ireland Protocol, potentially leading to a trade war.

Britain and the EU will intensify their efforts to break the impasse this week, the European Commission's Maros Sefcovic said.

Analysts were split over how much impact the Brexit tensions were having on the pound.

At 0852 GMT, the pound was flat on the day versus the dollar, at $1.341, lagging behind other major currencies which were benefiting from a "risk-on" mood in FX markets more broadly.

Versus the euro, it was also flat, at 85.325 pence per euro .

Weekly CFTC positioning data showed that speculators are overall bullish on the pound versus the dollar, and that in the week to Nov 9 the size of this net long position remained close to that of the week before.

Sterling rises

"The FX market has still been quite reluctant to price in any Brexit-related risk premium on GBP, despite multiple indications that the EU is planning to retaliate should the UK suspend parts of the NIP (Northern Ireland Protocol)," wrote ING strategists in a note to clients.

"Our moderately bullish bias on GBP for the remainder of the year is tied to the view that markets will continue to steer away from embedding much political risk into GBP."

But one-month risk reversals - a gauge of the market's expectations of the pound's direction - hit their lowest since December 2020 on Thursday last week. The gauge is in negative territory which indicates the market expects the pound to fall.

"The ever-falling level of the risk reversals suggests that the market is getting increasingly worried about the pound, which I suspect has something to do with the UK brinksmanship around Article 16," Marshall Gittler, head of investment research at BDSwiss Group, said in a client note.

In the week ahead, markets will be focused on the UK jobs report on Tuesday and CPI data on Wednesday.

Surprisingly high U.S. inflation data boosted the dollar to 16-month highs last week, prompting traders to raise their bets on a U.S. rate hike as early as mid-2022

The Bank of England will be the first major central bank to raise interest rates but whether that initial increase comes as soon as next month or if it waits until early next year has divided economists polled by Reuters.

At 0720 GMT, the rouble was 0.6% stronger against the dollar at 72.45. On Friday, it had hit 72.9775, its weakest since Oct. 4 apart from a seconds-long drop on the Moscow Exchange on Oct. 22 that was likely caused by a trading error.

Versus the euro, the rouble gained 0.4% to 82.97 .

The sharp decline in the rouble last week was triggered by a Bloomberg report saying that U.S. officials had told EU counterparts about concerns over possible Russian military intervention in Ukraine, analysts said.

The Russian troop movements near the Ukrainian border have spurred fears of a possible attack. But Moscow has dismissed such suggestions as inflammatory and complained about increasing activity in the region by the NATO transatlantic alliance.

President Vladimir Putin said in an interview broadcast on Sunday that he had rejected a defence ministry proposal to hold snap Black Sea military drills in response to NATO activity because he did not want to escalate tensions in the region.

Rouble hits 15-month high vs dollar before central bank rate decision

"The rouble looks oversold from the technical point of view, so we expect a gradual return of the dollar-rouble pair to 72," Promsvyazbank said in a note.

If geopolitical risks subside, the rouble should firm beyond the 72 mark against the dollar, Alor Brokerage said.

The rouble is set to receive support from month-end taxes that usually prompt export-focused companies to convert their dollar or euro revenues to roubles to meet local liabilities.

The rouble's high-yielding appeal also remains in place. The central bank is expected to raise its key interest rate for the seventh time this year at the Dec. 17 board meeting, to 8% .

Russian stock indexes were up after Friday's losses.

The dollar-denominated RTS index was up 0.6% to 1,794.2 points. The rouble-based MOEX Russian index was 0.1% higher at 4,124.9 points.