The pound rose as the prospect of UK rate cuts in the coming months receded amid the revelation that the reduction in August only came on the narrowest of margins.
The minutes of the August rate-setting deliberations which delivered the UK's first rate cut in two years took markets by surprise. A majority of 5-to-4 clinched the reduction and Bank of England governor Mervyn King was one of the unexpected dissenters.
Expectations of more rate cuts this year had already been scaled back when it was revealed this week that the CPI measure of inflation vaulted alarmingly above 2.0 pct to 2.3 in July.
But the apparent division of opinion in the central bank with governor King in the hawkish camp may spell a period of volatility for the pound, HSBC analysts said.
"With the hawks and doves now in two different camps the market will lurch with data," said Mark Austin at HSBC.
This may mean a rise in longer-term volatility for both sterling and market interest rates, he added. Separately, news that the UK labour market remains soft helped temper the pound's gains.
Official figures showed today that wage pressures in the UK economy appeared to have been relatively well-contained in June as employment levels fell for the second consecutive month.
The Office of National Statistics revealed that headline earnings, which include bonus payments, rose 4.2 pct in the three months to June from the previous year. This was 0.1 percentage point higher than the May rate but in line with market expectations.
Stripping out bonuses, average earnings in the three months to June rose by 4.0 pct, unchanged on the May rate and 0.1 percentage points below market expectations.
The earnings data are likely to further ease concerns on the BoE's rate-setting Monetary Policy Committee that higher wages may stoke wider inflationary pressures in the economy.
Elsewhere, the dollar was steady amid firm prospects of more rate hikes in the US.
Yesterday, it was revealed that soaring energy prices pushed the US consumer price index up by 0.5 pct in July against forecasts of a 0.4 pct increase. However, the core rate increased by only 0.1 pct, below expectations of 0.2 pct. Separately, official figures showed that US industrial output increased by only 0.1 pct in July from the previous month against expectations of a 0.5 pct increase. June's increase was also downwardly revised to 0.8 pct. In data due out today, US producer prices are expected to jump, largely due to higher energy costs -- a 4 pct year-on-year rise is predicted.
But markets will be looking for signs of rises in non-energy costs and will likely bid the dollar higher if these are to be found.