THE pound started to recover on Tuesday, rising on the back of surprisingly high inflation data and hopes that Theresa May's Government would strike a successful deal with the Democratic Unionist Party.
Sterling rose 0.5 per cent to trade at 1.273 against the US dollar, having fallen to eight-week lows a day earlier amid political jitters in the wake of last week's inconclusive election.
Versus the euro, the pound rose 0.6 per cent to trade at 1.137.
But the stronger pound weighed on the FTSE 100, which ended the day down 0.15 per cent or 11.43 points at 7,500.44.
Investors were reacting to higher-than-expected inflation figures, as well as signs that Mrs May was close to reaching a "confidence and supply" deal with Northern Ireland's DUP.
Data released on Tuesday showed that the Consumer Price Index (CPI) measure of inflation reached 2.9 per cent to its highest level in nearly four years in May, up from 2.7 per cent in April.
David Madden, a market analyst at CMC Markets UK, said: "The UK's strong inflation figures gave sterling its edge on the currency markets today.
"The CPI announcement was timed well, as it looks likely that the Conservatives will come to an arrangement with the DUP, and the combined effect is helping the pound."
Across Europe, the French Cac 40 rose 0.4 per cent, while the German Dax rose nearly 0.6 per cent.
In oil markets, Brent crude was up 0.3 per cent at around $48.41 per barrel (£38.02) after data signalled some declines in US crude inventories.
In UK stocks, Capita shares surged 83.5p to 634p after the outsourcing firm - which sent out profit alerts twice in three months last year - said it was making progress with a turnaround plan and was exploring a partnership with British Airways.
JD Wetherspoon shares rose 28.5p to 994p after the pub group said better- than-expected recent sales were set to lead to slightly improved trading for the year to July 30.
Ted Baker shares rose 45p to 2,470p as group revenue rose 14.2 per cent in the 19 weeks to June 10, while retail sales grew 8.4 per cent on a constant currency basis.
Shares in construction equipment firm Ashtead dropped 41p at 1,600p despite posting an eight per cent rise pre-tax profits to £765.1 million for the year to April 30 while rental revenues surged 28 per cent.
Recent terror attacks in Britain weighed on Merlin Entertainments, which logged fewer visitors at attractions such as Madame Tussauds and the London Eye. Shares fell 13.5p to 489.5p on the back of the news.
The biggest risers on the FTSE 100 were London Stock Exchange up 183p to 3,582p, Convatec Group up 9.5p to 324p, PaddyPower Betfair up 250p at 8,615p, and International Consolidated Airlines Group up 13.5p to 602p.
The biggest fallers on the FTSE 100 were 3I Group down 27.5p at 901p, Merlin Entertainments down 13.5p to 489.5p, Ashtead Group down 41p at 1,600p, and Centrica down 3.6p at 197p.
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