Sterling fell to a nearly two-week low against the euro on Thursday after the European Central Bank raised interest rates as widely expected and left the door open for more hikes later this year.
After raising rates to 2.5 percent, ECB President Jean-Claude Trichet said rates were still low in the single currency bloc and cited upside risk to prices.
"Trichet kept most of his options open at this meeting. He indicated that the ECB would do whatever was necessary to maintain the credibility of monetary policy, and to anchor inflation expectations," ING said in a note to clients.
Trichet said interest rates remained stimulative for the world's second largest economic bloc while the ECB also raised its forecast for eurozone consumer inflation (HICP) in 2006 and 2007 and increased growth projections.
Markets have priced in a another 25 basis point rate hike in June and expect benchmark rates to rise to 3 percent by year-end.
By 1535 GMT, sterling has lost 0.7 percent against the euro at 68.61 pence.
It was nearly flat versus the dollar at $1.7491, after hitting a three-week high in the previous session on upbeat UK mortgage lending data.
BNP Paribas said sterling/dollar had broken the important $1.7555 level to test $1.7595.
The pound pulled back on Wednesday after a recovery in the dollar was spurred by stronger than expected US manufacturing data.
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