Against the euro, however, it fell for the first time in four sessions, breaching 85 pence per euro as the euro zone recorded its first above-one percent inflation reading since 2013.
The early departure of Britain's ambassador to the European Union on Tuesday, and the prickly tone of his resignation letter, added to concerns of a rocky period ahead for sterling as Britain prepares to launch formal talks on leaving the bloc.
But economic data remains stronger than many economists expected after June's Brexit vote, and construction and consumer credit data on Wednesday both beat forecasts, sending sterling up as high as $1.2306.
It came a day after figures showed manufacturing growth hit a 2-1/2-year high last month and boosted the pound.
Markets were still trying to find their post-Christmas rhythm, said Ned Rumpeltin, head of European currency strategy at TD Securities, who flagged minutes from the Federal Reserve's last meeting due to be published during U.S. trading.
"For sterling there also is zero Brexit risk premium priced in at the moment," he added, referring to TD's differential model, which looks at where currencies trade based on countries' interest rates.
"So on that basis it means there is more room for some risk premium to come back in the next few weeks, particularly as we have the supreme court decision due."
Britain's impending negotiations over its divorce from the EU are expected to keep weighing on the pound, though national elections in France, Germany and the Netherlands this year all hang over the euro.
Marine Le Pen, the far right's candidate in France's presidential vote said on Wednesday that France should leave the euro and shift to a new national currency tied to the shared currency in similar way to the pre-euro 'ECU' era.
Sterling sagged 0.2 percent on the day to trade at 85.19 pence per euro after it was revealed Britain's outgoing EU ambassador called on colleagues to challenge "muddled thinking" and said Prime Minister Theresa May's objectives for Brexit were still unknown to her government's staff in Brussels.
Wednesday's trading left sterling down from a two-week high of 84.51 pence on Tuesday but well within a range it has held since November.
"I don't think any of that story can be positive for the currency. It highlights the uncertainty that has weighed on sterling for some time," HSBC strategist Dominic Bunning said.
"It is not a massive new reason to sell cable (sterling/dollar) and was probably offset by the positive economic data we got."
(Additional reporting by Patrick Graham; editing by Richard Lough)
By Marc Jones
