Sterling was on track for its biggest daily rise against the euro in six months on Thursday after eurozone inflation data bolstered expectations for looser monetary policy from the European Central Bank. That contrasted with UK data showing British house prices rose at their fastest annual pace in more than three years this month and kept alive chances that the Bank of England could tighten policy much sooner than it has flagged.
Amid higher than usual volumes on the Reuters Matching platform, the euro fell 0.9 percent against sterling to 84.865 pence, its lowest in a week. The losses took it well below a two-month high of 85.85 pence struck on Tuesday.
"The low inflation environment leading to expectations for rates to go lower is putting pressure on the euro and sterling/euro has jumped," said Chris Towner, director of FX advisory services at HiFX.
Euro zone flash annual HICP inflation fell to just 0.7 percent in October. This may raise concerns among euro zone policymakers about deflation risks and damage to the economy from a strong currency. Euro zone unemployment was steady at a record high of 12.2 percent in September.
ECB Governing Council member Ewald Nowotny said earlier on Thursday the central bank would provide more liquidity when cheap long-term loans it made in late 2011 and early 2012 expire. All of this undermined the euro broadly.
"The UK is doing much better than the euro zone. So we expect a euro selloff to gather pace and for it to drop against sterling," said Sasha Nugent, currency analyst at Caxton.
Against the dollar, sterling was flat, trading at $1.6030. It hit a two-week low of $1.5999 on Wednesday and was on track for its first monthly losses in three months.
The pound broadly held its ground, despite the dollar index gaining 0.4 percent. The dollar's rise came after the Federal Reserve on Wednesday dropped a phrase expressing concern about a run-up in borrowing costs and made no direct reference to the government shutdown this month.
"The Fed was not as dovish as expected. The market had expected a far more pessimistic view after the partial (US government) shutdown. But that hasn't happened. So that has given the dollar a bit of a lift," said Caxton's Nugent.
In the UK, strong rises in British house prices, combined with other strong data including a recovery in the jobs market, had led investors to bring forward expectations of when the Bank of England will raise interest rates.
However, these bets have been trimmed after the most recent numbers - including some forward-looking surveys - suggested the recovery may start to lose some steam and the market may have run ahead of itself in pricing in rate hikes.