Sterling rowed back from a recent 15-month high against the dollar on Wednesday after the Bank of England's quarterly inflation report proved to be less hawkish than some in the market had expected.
In its inflation report, published a week after it unexpectedly raised rates to 4.75 percent, the central bank said its expected profile for economic growth and inflation over the next two years was higher than in May.
Most significantly, the CPI rate was expected to be well above the 2.0 percent target in 2 years if interest rates remained at their current level.
But the pound fell because financial markets had priced in a more aggressive monetary tightening campaign after last week's hike.
The report "is probably marginally dovish. The inflation forecast that they used, used market rates from before the meeting," Westpac currency strategist Geoff Kendrick said.
By 1411 GMT, sterling was broadly steady against the dollar at $1.9096, having fallen some 20 ticks just after the report. Against the euro it fell to 67.47 pence.
The pound hit a 15-month high on Tuesday at $1.9144 after the US Federal Reserve decided to keep rates on hold at 5.25 percent.
Before the inflation report, the pound was also briefly dented by UK June trade figures, which showed Britain's trade gap had narrowed less than expected to 6.463 billion pounds.
"The trade data was a little bit worse than expected, overshooting in June," said Paul Robson, currency strategist at RBS.