Sterling hit its lowest mark in two-and-a-half months against the euro on Tuesday as interest rate and bond yield spreads moved against it, and lost ground against the dollar despite equities recouping earlier losses.
Surprisingly strong US housing and consumer confidence data fuelled a stock market recovery which lifted sterling as much as a cent from the day's low versus the dollar, but wasn't enough to fully eclipse the bearish sentiment clouding it.
The yield on the two-year UK gilt fell to its lowest ever level, reflecting the view that UK interest rates will stay low for a protracted period to revive the struggling economy. British mortgage data on Tuesday were mixed - mortgage approvals in July jumped to their highest in 17 months but growth in net lending was the weakest in nine years.
"We've had a cumulative build in risk appetite during the day ... but one thing that's been striking has been the powerful upswing in cable is starting to peter out, and euro/sterling is starting to trend higher," said Robert Minikin, senior currency strategist at Standard Chartered in London.
At 1505 GMT, the euro was up 0.4 percent on the day at 87.45 pence. The euro rose to its highest level since June 8 at 87.575 pence, pushing further away from technical support at the 100-day moving average of 86.96 pence. Euro/sterling, on its longest winning streak since March of five consecutive daily gains, on Monday posted its first close above the 100-day moving average since April 4, Reuters charts showed.
Sterling shed a quarter of a percent to $1.6377. Earlier it fell to $1.6338 before recovering to $1.6443 in line with equities erasing their losses. The two-year gilt yield fell as low as 0.816 percent on Tuesday, reflecting the adjustment in rate expectations and possibly the continued threat of disinflation.