Sterling trimmed its gains on Tuesday after rallying on a jump in UK consumer prices, as investors acknowledged that higher inflation for now was unlikely to lead to an interest rate rise before year-end. The view that higher price risks may hold back the economy's patchy recovery also capped demand for the UK currency.
The pound jumped more than half a cent to a session high of $1.6305 after data showed year-on-year UK consumer prices hit a 2-1/2-year high of 4.5 percent on the year in April, more than consensus forecasts for a 4.2 percent reading. But traders later cited options-related selling and profit-taking at the day's high that pushed the pound down to $1.6206 in late London trade.
Softer commodity and stock prices prompted investors to shed risky assets, which also put sterling on the back foot. In a letter to the UK Treasury, BoE Governor Mervyn King said that trying to bring inflation back to target quickly would risk harming the economy and undershooting the central bank's 2.0 percent target in the medium term.
Analysts said the data did little to change expectations that UK rates will rise from 0.5 percent in November at the earliest - slower than other regions including the eurozone - as indicated by short-term interest rates. Against the dollar, sterling hovered below its 55-day moving average at $1.6288, and technical analysts said the pound's inability to stay above that level suggested room to extend its month-long losing streak. The euro initially slipped around 30 pips to a session low of 86.80 pence before pulling back to 87.40 pence. The single currency has retreated from around 90.50 pence hit earlier this month, its strongest since March 2010.
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