Britain has ruled out any form of customs union with the European Union after Brexit, according to a source in Prime Minister Theresa May's Downing Street office.

Amid those brewing tensions in the background, British and European Union negotiators this week hold their first formal Brexit talks since the interim deal in December unlocked discussions on their future relationship.

"Sterling remains sensitive to any Brexit-related headlines though the market remains inclined to buy sterling from a medium term view and what the market will be focused on is the tone of the Bank of England from the policy meeting this week," said Morten Helt, a senior FX strategist at Danske Bank.

Sterling was flat on the day at $1.4126, just above an intraday low of $1.4083, its lowest since Jan. 30.

Analysts say the currency is also being supported by a repricing of Bank of England interest rate hike expectations - several banks are now calling for a rise to come in May, and for another to come later in the year.

BoE Governor Mark Carney sounded a more upbeat tone than previously at a testimony last week, saying wage growth was finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation.

The central bank releases its inflation report on Thursday and announces a decision by its monetary policy meeting where it is expected to keep interest rates on hold.

Though oil prices, a key component of the import basket and a big driver for inflation, have rallied by more than 10 percent since the Bank of England raised interest rates in November, the impact has been mitigated by sterling's 6 percent rise in that period.

Latest positioning data showed net long sterling positions remained at their highest levels since July 2014.

Britain's economy slowed sharply in January, according to a survey and ratings agency S&P Global said that disorderly Brexit would bring renewed downward pressure to the country's sovereign rating.