Sterling strengthened on Wednesday, particularly against the euro, after data showed that the deterioration in the UK service sector slowed and a credit rating downgrade of Russia spurred heavy euro selling. Sterling's rally was fuelled by a broad-based improvement in investors' appetite for perceived riskier assets on the back of stronger-than-expected service sector data across the globe and US private sector jobs figures.
The focus for sterling now shifts to the Bank of England's interest rate decision and statement on Thursday. Economists and financial market pricing point to a cut of 50 basis points to 1.0 percent.
"Today's move does not seem to be a sterling move because it would be very surprising if people were doing much with sterling ahead of a big event like tomorrow, they'll wait and see what the BoE does and then take a position, and if you look at dollar/sterling that's been broadly stable today," said Barclays Capital FX strategist Adarsh Sinha.
At 1525 GMT, the euro was 1.6 percent lower versus sterling at a session low of 88.69 pence. Sterling was up 0.5 percent on the day at $1.4554, and traded at a two-week high of $1.4573. Earlier in the global session it was as low as $1.4326.
The slide in euro/sterling began after data showed the Chartered Institute of Purchasing and Supply/Markit purchasing managers' service sector index rose to 42.5 in January from 40.2 in the previous month, and higher than market forecasts of 40.4.
"We're still in deep contraction territory in terms of historical activity levels but at least we're seeing a small rebound which is slightly encouraging," said Brown Brothers Harriman senior FX strategist Audrey Childe-Freeman.
Soaring job losses and crumbling consumer sentiment mean a half percentage point cut is still fully discounted. Rate futures are evenly split on whether the BoE will go further and cut to 0.75 percent. The euro's slide accelerated after Fitch Ratings downgraded Russia's long-term foreign and local currency ratings to triple-B, sparking fears of a deep downturn in eastern Europe.