Sterling has jumped to a one-year high as the Bank of England came under pressure to hike interest rates following a larger-than-expected leap from inflation.
The pound was up more than 0.8% versus the US dollar at 1.327, marking its highest level against the greenback since September 2016.
The currency was also gaining ground against the euro, hovering near a six-week high at 1.109.
However, the stronger pound weighed on the FTSE 100 Index, which closed down 12.9 points at 7,400.69.
It comes after data from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation hit 2.9% in August, outstripping economists' expectations of 2.8%, thanks to higher clothing and fuel prices.
"The GBP/USD hit a one-year high today as the stronger-than-expected inflation figures from the UK prompted buying," David Madden, a market analyst at CMC Markets, said.
"The pop higher in inflation will make for an interesting Bank of England (BoE) meeting on Thursday.
"The market isn't expecting any change in the monetary policy but it is pencilling in for two BoE members to vote for a rate hike."
Across Europe, the French Cac 40 and German Dax both ended the day higher up 0.6% and 0.4% respectively.
Brent crude prices rose 0.7% to 54.30 US dollars (£45.39) per barrel following reports oil production among Opec members fell last month, suggesting agreements to output curbs could start impacting the global glut.
In UK stocks, Sky shares took a tumble after Culture Secretary Karen Bradley said Rupert Murdoch's £11.7 billion bid to take full control of the broadcaster faces a potential wider investigation by the competition regulator.
She told MPs she is now also minded to ask the Competition and Markets Authority (CMA) to conduct a fuller investigation into 21st Century Fox's bid on the grounds of "genuine commitment to broadcasting standards".
This followed her confirmation she still has an "intention" to ask the CMA to examine the proposed merger on the grounds of media plurality.
Ms Bradley outlined her decision on whether to refer the bid for a six-month investigation to the CMA in a statement in the Commons.
Shares in Sky closed down more than 1%, or 15.5p to 937p.
Away from the top tier, Retailer JD Sports hailed another record set of results and upped its earnings outlook for the full year after robust sales.
The group cheered an "exceptional first half" after it saw pre-tax profits leap a third higher to £102.7 million in the six months to July 29.
It said full-year profits were now set to come in towards the upper end of market expectations, which are currently in the range of £268 million to £290 million.
Shares in the FTSE 250 firm surged 31.1p to 373.7p.
The biggest risers on the FTSE 100 were Ashtead group up 75p to 1,759p, Barclays up 4.7p to 191.35p, Royal Bank of Scotland Group up 5.9p to 249.7p and Smurfit Kappa Group up 55p to 2,386p.
The biggest fallers were Randgold Resources down 235p to 7,765p, Fresnillo down 37p to 1,570p, Persimmon down 52p to 2,503p, and British American Tobacco down 99p to 4,798.5p.
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