The pound slipped on Tuesday after data showed the British labour market weakened in July even as wage growth stayed strong, and as the dollar advanced.
Sterling rose after the data was released but pared its gains and was last down 0.27% at $1.2475, after climbing 0.35% on Monday.
Britain's unemployment rate ticked up to 4.3% in the three months to July, from 4.2% in June, figures from the Office for National Statistics showed on Tuesday.
That was despite wages excluding bonuses standing 7.8% higher than a year earlier in the three months to July, in line with economists' expectations and matching the record pace set in June.
Part of the fall in the pound was down to a rise in the dollar, which was up 0.27% against the euro. Against the pound, the euro was flat at 85.92 pence.
The data comes ahead of the Bank of England's interest rate decision on Thursday next week. Many analysts said the rise in unemployment means the Bank cannot raise rates much further, after pushing them to 5.25% from just 0.1% in December 2021.
"Today's release adds to signals of a weaker start to economic activity in Q3," said Emma Wilks, UK economist at Lloyds Bank, pointing to the rise in unemployment.
"The upward pressure on wage growth came from the public sector while private sector pay softened, and with expected pay growth over the next year also softening, we may have now seen the peak in private sector pay pressures."
Sterling has been one of the best performing currencies this year, up 3.2% since the start of January, but has fallen in recent weeks as cracks have started to show in the UK labour market and the dollar has risen.
The unemployment rate has increased to 4.3% from 3.8% in April and 3.5% in August 2022.
Yet wage growth has remained resilient, putting Bank of England policymakers in a difficult position.
BoE rate-setter Catherine Mann said on Monday that it was too soon for the BoE to stop raising interest rates, and that it was better for the central bank to err on the side of raising them too high.
Pricing in derivatives markets showed that traders see an 78% chance that the BoE raises rates by 25 bps on Thursday next week and a 22% chance they leave them on hold.
The dollar index, which tracks the greenback against six major peers, was last up 0.18% to 104.76 on Tuesday.
It has risen around 5% since mid-July as the U.S. economy has remained strong while other parts of the world have slowed, sending investors towards the safe-haven currency.
(Reporting by Harry Robertson; Editing by Amanda Cooper, Ed Osmond and David Evans)