Sterling touched 3-month highs versus the dollar on Monday after UK data showed manufacturers' costs rising at the fastest rate since records began, while manufacturing output rose for the first time since October.
The figures supported views that the Bank of England would not hurry to cut interest rates further from the current 5.25 percent after it stood pat on borrowing costs last week.
Seasonally adjusted input prices were 19.3 percent higher this January than a year ago - the fastest annual rate of increase since records began in 1986. This outweighed news of slower than expected rises in core factory gate prices. "If it wasn't for the fear of pipeline inflationary pressures and inflationary expectations...the Bank would be cutting more aggressively," said Amit Kara, UK economist at UBS. "Today's data - particularly on the prices side - continues to show that inflation is a worry and they will cut but not immediately, they will go periodically rather than each month."
By 1516 GMT, the pound was steady at $2.0161, having earlier risen as high as $2.0220. The euro fell as low as 75.96 pence - almost a full pence below last week's record highs - before recovering to 76.15 pence.
UK borrowing costs are expected to fall by another 75 basis points by year-end - the same amount of monetary easing over the next nine months as investors expect the US Federal Reserve to administer before the end of March.
Aggressive US rate cuts, implemented to try and stave of recession in the world's biggest economy, have undermined the dollar's yield appeal. Negative sentiment on the US currency has also played to sterling's advantage in recent weeks, but a stronger euro/dollar rate has seen the pound fall to record lows versus the single currency.