Sterling slipped to its lowest in nearly two weeks against the dollar and eased away from recent eight-week highs against the euro on Thursday, as markets took profits in the wake of a largely anticipated rate hike.
The Bank of England's (BoE's) quarter point increase, which brought its benchmark repo rate to 4.5 percent, marked an acceleration of its gradual monetary tightening but only matched market expectations.
This left investors wondering when the BoE would move next and saw the pound drop more than one cent against the dollar.
"There was a bit of buy the rumour, sell the news. It was well flagged - the market had fully incorporated the rate hike at this stage," said Peter Fontaine, currency strategist at KBC in Brussels.
"For today, I'm not going to draw too many conclusions out of it. Sterling may still strengthen over the next weeks to go for a test of the euro/sterling year-low in the 65.50 zone."
By 1404 GMT sterling had erased most of the day's losses against the dollar to stand at $1.8268. After the BoE announcement it rose quickly to $1.8304 but then rapidly sold off to $1.8190, its lowest since May 27.
Against the euro it remained nearly a quarter percent lower on the day at 65.98, but up slightly from the day's low of 66.19 pence per euro, which it hit in the post-BoE selloff.
"That was one of the most flagged rate hikes of recent times. Market expectations have been fulfilled and the market was pretty long of sterling versus the euro beforehand," said Tim Fox, market strategist at National Australia Bank.