The pound hit a two-week high on Tuesday, while the Aussie dollar was among the major losers after Australia's central bank raised interest rates less than expected.
Sterling rebounded to a two-week high in the wake of the UK government's U-turn on plans to axe the top rate of tax.
With GBP/USD having hit a historic low of US$1.035 in the aftermath of chancellor Kwasi Kwarteng's contentious mini-budget this morning rose 0.7% to US$1.1429 before dropping back slightly.
Analysts said Cable remained under significant pressure in the face of a looming recession and with the US Federal Reserve likely to continue aggressive rate rises.
But the Bank of England has signalled via its daily bond auctions, which it was forced to launch last week after the market turmoil that followed Kwarteng's fiscal statement, that it is not aiming to keep UK government borrowing costs low.
Monday’s auction saw just over £22mln spent by the Bank while it rejected almost £1.9bn of bond offers.
Mark Capleton, rates strategist at Bank of America, told media that Threadneedle Street’s small gilt purchases signalled it was only acting as a “circuit breaker” and did not want to be perceived as trying to cap borrowing costs.
The Aussie dollar, meanwhile, wavered after the Reserve Bank of Australia (RBA) made its sixth hike in as many months, raising interest rates 25 basis points to a nine-year peak of 2.60%, though markets had pencilled in a 50bps hike.
AUD fell 0.2% against the pound and 0.25% against the US dollar and 0.6% versus the euro, though it brought relief to the Australian stock market.
"It may also have brought relief to other ‘smaller’ G10 central banks who have been caught up in rush of large incremental rate hikes in recent months probably designed to prevent their currencies falling too far against the mighty USD," said analysts at Rabobank.
They added that "various models suggest that the AUD is far less undervalued vs the USD than the majority of other G10 currencies, while Australia’s CPI inflation rate is at the lower end of the range of G10 economies.
"This likely afforded the RBA with the breathing room to move away from large incremental rate hikes. That said, the trigger for a more conservative pace of policy tightening is likely rooted in the Australian property market."
Elsewhere, the US dollar remained in correction mode, with the dollar index (DXY) nearly 3% off its 28 September peak.
“In our view, this has not been accompanied by a radical change in the medium-term narrative that has backed the dollar rally so far: despite somewhat weaker-than-expected ISM manufacturing figures yesterday, the US domestic story remains rather solid, leaving the Fed tightening prospects alive even if markets have recently revised the expected terminal rate to sub 4.50% levels,” said ING bank.
Friday’s US jobs report is seen as a potential trigger for a fresh hawkish re-pricing, and a positive event for the greenback.
The euro was on the rise against a number of currencies, including NZD, JPY, GBP and USD.
EUR/USD was seen as benefitting from the improvement in global risk sentiment and the dollar correction, though the moves were not particularly bullish given the economic gloom and reports from Ukraine.