The FTSE 100 fell 0.4 percent, as a pull-back in oil and tobacco stocks, which had pushed up the index in the previous session, outweighed gains in banks and materials.
Sterling rose after a media report said that Britain and the European Union had made progress on the Irish border question, a major hurdle to agreeing a Brexit deal.
The currency was also supported by the Bank of England raising its forecast for third-quarter GDP growth following a widely expected decision to keep rates on hold.
Currency strength weighed on shares in big international exporters, which are heavily represented on the index.
Morrisons fell 2.1 percent despite its first-half profit growth beating forecasts and a quarterly sales performance that was its best in nine years.
Some analysts were concerned about pressure from low-cost competitors, arguing the strong update was a one-off.
"The question now is where can Morrisons go from here? There remains some intense pressure from discounters, whilst Tesco has lately announced its own discount chain aimed at countering the German upstarts. Further pressure on margins seems inevitable," said Neil Wilson, analyst at Markets.com.
Other retailers were also under pressure on a negative read-across from poor results from the country's biggest department store group John Lewis, whose profit was wiped out in the first half as it was forced to match discounting by its struggling rivals on a fiercely competitive high street.
Small cap Debenhams fell 9.1 percent after Sports Direct ruled out a bid for the department store operator.
Banks, whose lending business benefits from rising interest rates, provided some support to the FTSE.
Shares in Royal Bank of Scotland rose 1.1 percent as its chairman was reported as saying the lender could pay a special dividend. HSBC also rose and Barclays was flat.
Following the BoE meeting, analysts at Rabobank said they stuck to their view that May 2019 was "the first realistic opportunity" for the central bank to raise rates.
Miners were also in demand as copper prices rallied after a US official said Washington had invited Beijing to restart talks aimed at resolving their trade dispute.