Sterling gained some ground against the retreating dollar on Tuesday as investors sold the US currency ahead of the Federal Reserve's interest rate decision.
But fresh signs of weakness in Britain's housing market capped the pound's gains and depressed it against the euro.
"The housing data was consistent with what the market already knows but we need a bit more of solid evidence, further signs of deterioration in retail sales (to show the economy is faltering)," said Trevor Dinmore, foreign exchange strategist at Deutsche Bank in London.
"Cable (sterling/dollar) is underperforming euro/dollar due to the soft housing data," he said.
At 1445 GMT sterling traded a quarter of a percent stronger on the day at $1.7917. However, the euro gained more than 0.6 percent on the US currency and 0.3 percent against the pound, trading at 68.34 pence.
All financial markets were focusing mainly on the Federal Reserve's interest rate decision later in the day, waiting to see if the central bank delivers a widely expected hike and gives any clues about future decisions.
But meanwhile, data from the Royal Institute of Chartered Surveyors (RICS) showed British house prices falling at their sharpest pace in more than a year in the three months to August.
The RICS said its seasonally adjusted house prices balance fell to -12 in August from +3 in July. That was the lowest since May 2003 and the first negative reading since June 2003 when prices were depressed in the aftermath of the war in Iraq.
The survey is just the latest indicator suggesting that Britain's booming housing market has finally come off the boil after five interest rate rises and tough talk from the central bank to slow it down.
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