The pound struggled for direction on Wednesday (14 December), after data showed a decline in UK employment for the first time in over a year and investors looked ahead at the upcoming Federal Reserve meeting tonight.
Sterling had climbed above $1.27 and over €1.20 in the previous session but failed to sustain those gains and, by early afternoon, was down 0.10% against the euro, trading at €1.1895, and broadly flat against the dollar at $1.2668.
According to data released by the Office for National Statistics, the number of people employed declined by 6,000 to 31.76 million, the first drop since the second quarter of 2015.
Elsewhere, the dollar was on the back foot against its major rivals as investors were on guard ahead of the Fed meeting.
The greenback fell 0.17% and 0.18% against the yen and the euro respectively, exchanging hands at ¥114.99 and €0.9393.
The US currency was also lower against its Australian and Canadian counterparts, slipping 0.20% against the former and 0.11% against the latter to trade at AUD$1.3317 and CAD$1.3117.
With the probability of an interest rate increase this evening almost certain, analysts suggested Fed chairwoman Janet Yellen's press conference and dot plot for further clarity on rate timings in 2017 will attract most of the attention.
"The engine behind dollar's resurgence this quarter has been the inflated expectations of [Donald] Trump's administration boosting US economic growth via fiscal stimulus measures," said FXTM research analyst Lukman Otunuga.
Optimism over rising inflation from healthy growth swiftly sparked aggressive speculations of the Fed raising US rates repeatedly in 2017 to prevent the economy from overheating.
"Dollar bullish investors may be seeking for hawkish comments from the Fed revolving around the potential impacts of higher inflation and Trump's effect but could be left empty-handed if the central bank adopts a cautious approach," Otunuga added.
Despite the latest dip, the dollar has outperformed its rivals over the last couple of months and the Fed's expected hike will deliver it another boost. However, Think Markets UK analyst Naeem Aslam added the US central bank might want to avoid the dollar strengthening too much.
"Maybe the Fed do not want to see the dollar strengthening to a level which itself could become a problem for the economy," he said.
"We anticipate Yellen may use a level-headed strategy because the real effects of Trump's stimulus could take its time to filter down to the economy. The data dependent approach could be the right strategy with respect to their interest rate hike."