Persistent default worries surrounding Chinese developer Evergrande sapped confidence across global markets, boosting the safe-haven dollar and weighing on risk-oriented currencies such as the pound.
Sterling, which had risen as high as $1.375 during the previous session, retreated 0.38% to about $1.371 at 1500 GMT.
Against the euro, the pound ticked 0.15% down at 85.65 pence.
Markets brought forward their expectations of an interest rate rise after the BoE on Thursday lifted its forecast for inflation and two of its policymakers called for an immediate halt to its 895 billion pound ($1.23 trillion) bond purchase programme.
Ten-year gilt yields rose over 10 basis points on the day and another 2.5 basis point on Friday, bringing them to a high of 0.935 percent unseen since March 2020.
"A first rate step in Q1 is now priced in by financial markets which is likely to provide support for sterling for now," wrote Commerzbank analyst Esther Reichelt, adding however that Britain's economic recovery faced challenges ahead.
"To be quite clear: we consider the current GBP strength to be justified, but continued challenges for economic growth such as the labour shortages that have been aggravated by Brexit are likely to prevent a rapid tightening of monetary policy," she said.
Jeremy Thomson-Cook, chief economist at business payments firm Equals Money also took the view that there was now a limited upside for the British currency.
"The expectations game has got it this high but can't take it higher; sterling could easily be hitting a near-term top", he wrote.
Sterling took a hit on Monday after worries about China's Evergrande defaulting on its debts sent investors into safer assets and currencies.
After a brief respite, investors continued to worry about the fate of the Chinese property developer which missed an interest payment deadline on Thursday and has entered a 30-day grace period.
Stock markets in Asia and Europe fell, Wall Street opened lower on Friday and risk-oriented currencies were under pressure given the potential consequences of an Evergrande default.
(Reporting by Julien Ponthus; Editing by Toby Chopra and Gareth Jones)
By Julien Ponthus