The pound hit an 11-day high against the euro on Tuesday (18 October), as reports showed Britain's consumer price index inflation (CPI) reached the highest level since November 2014.
Having touched a new six-year low against the common currency in the previous session, sterling rose to an 11-day high of 89.60p per euro on Tuesday, before edging slightly lower to 89.53p by early afternoon.
The UK currency was also on the front foot against the dollar, rising 0.76% to fetch $1.2271. The gains came as a the Office for National Statistics said inflation grew 1% year-on-year in September, compared with analysts' expectations for a 0.9% increase and after climbing 0.6% in August. On a month-on-month basis, meanwhile, inflation edged 0.2% higher, in line with expectations and slightly below the 0.3% gain posted in the previous month.
Paul Hollingsworth, UK economist at Capital Economics, warned the sharp drop in sterling on a trade-weighted basis since the referendum has put inflation on a steeper upward trajectory for the next few years.
"We think that CPI will breach the Monetary Policy Committee's 2% target around spring next year, and will peak at about 3.2% in the first half of 2018, once the direct and indirect effects of the pound's fall have had time to feed through," he added.
Ipek Ozkardeskaya, senior market analyst at London Capital Group, indicated the latest inflation report could reduce the chances of sterling falling even further against the dollar.
"The rise in the UK's inflationary pressures could interfere with the BoE's unorthodox plan, prevent the bank from a further rate cut in the medium term and even bring the possibility of a premature rate rise on the table," she said. "The likelihood of the pound depreciating below $1.20 level is declining."
The pound was also boosted by comments from a UK government lawyer, who suggested it was "very likely" the Parliament would have to ratify any agreement between the European Union and the British government over Brexit.
Elsewhere, the dollar was broadly unchanged against the euro, exchanging hands at $1.097, and gained 0.13% against the yen to trade at ¥104.02.