LONDON: Sterling briefly hit a four-day low on Wednesday after British inflation cooled unexpectedly, raising concerns that the Bank of England might not implement further increases to interest rates after next month's expected hike.
But investors trimmed some short bets as they judged the fall was too excessive against a broader economic backdrop still supportive of a quarter-point increase to rates next month.
A May increase already firmly baked into market expectations and a recent string of strong data and a Brexit transition agreement has prompted suggestions that the central bank will follow up with another increase in November.
"Sterling fell far too much on one data set. Markets are settling down now and we expect the currency to be rangebound before May's rate hike," said ING forex strategist Viraj Patel.
Wednesday's official data showed annual consumer price inflation fell to 2.5 percent in March, down from 2.7 percent in February and below economists' expectations.
"Sterling has fallen against the dollar, not because an imminent interest hike has been called into question - this now seems all but assured - but rather because today's data casts doubt over the likelihood of a further rate hike in November," said Jake Trask, a forex research director at OFX in London.
The British currency slid 0.8 percent to $1.4173 in London trading, its lowest since last Thursday and a striking reversal from Tuesday climb to $1.4377, its strongest since the Brexit referendum.
It later trimmed some of those losses to stand only 0.4 percent down at $1.4233.
Growing bets of further rate increases have boosted sterling in recent weeks, taking it to the top of the league tables as the best-performing G10 currency with a 5 percent gain so far this year. The Bank of England will raise its key interest rate to 0.75 percent in May, said nearly all of 76 economists polled by Reuters, with another 25 basis point rise expected just before Britain is due to leave the European Union early next year.
Against the euro, sterling weakened by 0.5 percent to 87.03 pence.
Britain's internationally exposed FTSE 100 index extended gains to a session high after the UK inflation data and was last up 1.1 percent.
British government bond prices surged after the data, pushing two-year yields down 6 basis ponts on the day to a two-week low of 0.830 percent, while 10-year yields dropped by 5 basis points to 1.387 percent. December short sterling interest rate futures rose 4 ticks on the day to a four-week high.
Euro zone bond yields extended their falls after the UK inflation numbers as British gilt yields tumbled.
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