Sterling rose more than one percent against the dollar on Tuesday, regaining its poise after posting the biggest one-day percentage loss on a trade weighted basis since September 1992 the previous day.
The pound's rise dove-tailed with strong gains in other higher-yield currencies, including those of Australia and New Zealand, as markets expected the dollar's yield to be eroded further with a hefty US rate cut at 1815 GMT. Futures markets are pricing in a 90 percent chance of US rates being lowered by 100 basis points from 3 percent.
Sterling sentiment was also boosted by inflation data showing consumer prices rose 0.7 percent last month, taking the annual rate to 2.5 percent, further above the Bank of England's 2 percent target. Analysts said the data pared expectations for near-term UK rate cuts from 5.25 percent.
By 1429 GMT, sterling was up 1.04 percent on the day at $2.0189, while the euro was down 0.6 percent at 78.14 pence. On Monday the euro hit a record high at 79.12 pence fuelled by its rise to historic peaks above $1.59.