Sterling falls to a more than one-week low versus euro

The Bank of England has already raised interest rates four times since December, more than any other major central bank, but slowing growth and the cost-of-living crisis have prompted some analysts to scale back their expectations for future increases. "We could see EUR/GBP rise to around 0.86 short-term, as relative monetary policy will continue to favour the euro," Pedersen added.

Britain's pound fell to a more than one-week low against a strengthening euro on Tuesday but was little changed against the U.S. dollar ahead of data that could provide a clearer picture of the UK's growth outlook.

At 0753 GMT, the pound was down 0.3% against the euro to 85.24 pence, its weakest level against the single currency since May 16. "The bounce in EUR/GBP owes to the broad move higher in the euro on the back of comments in the past two days from the ECB’s Lagarde on the near-term prospect of rate hikes," said Jens Naervig Pedersen, Danske Bank chief analyst, FX and rates strategy.

European Central Bank chief Lagarde said on Tuesday she saw the ECB's deposit rate at zero or "slightly above" by the end of September, implying an increase of at least 50 basis points from its current level. The Bank of England has already raised interest rates four times since December, more than any other major central bank, but slowing growth and the cost-of-living crisis have prompted some analysts to scale back their expectations for future increases.

"We could see EUR/GBP rise to around 0.86 short-term, as the relative monetary policy will continue to favor the euro," Pedersen added. Sterling was broadly flat against the dollar at $1.2590.

Flash estimates for the May manufacturing and services purchasing managers indexes are scheduled to be released at 0830 GMT, which could give a clearer view on how the economy is faring. "The May readings will again be impacted by the Ukrainian crisis and by Covid restrictions in China but, overall, we expect another set of solid outturns," analysts at Lloyds Bank said in a research note.

Meanwhile, British public borrowing in the 2021/22 financial year fell to 144.6 billion pounds or 6.1% of GDP, figures from Britain's Office for National Statistics showed on Tuesday, down more than 7 billion pounds from an initial ONS estimate last month.

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