The pound dropped on Tuesday after a rise in Britain’s jobless numbers suggested fewer Bank of England rate increases could be needed in the coming months to bring down inflation, helping the broad dollar index to push back towards Monday’s five-week peak.

Sterling dropped as much as 0.5 per cent against the dollar to $1.2467 and also softened to 87.17 pence per euro after Britain’s unemployment rate unexpectedly rose to 3.9 per cent in the three months to March as more people sought to get back into the jobs market.

Current market pricing indicates at least one more 25 basis point rate increase from the Bank of England, with a good chance of a further hike, but analysts said this data could cause the BOE to be more cautious.

Broader factors are also weighing on the pound as well, said Jane Foley, head of FX strategy at Rabobank: “A lot of the better news for sterling is already in the price. Is there enough good news in the economy to go outright long? The answer is not really. What markets were pricing in was a better economic outlook, not a good one.”

As the pound sold off, the dollar index ,USD=>, which tracks the unit against six main peers, rose to 102.57, just shy of Monday’s five-week top of 102.75, as the US currency hints at a rebound from its recent weakness.

“Market expectations were for a fed rate cut this year, but the data just isn’t playing ball, and adding to that, there is a bit of safe haven demand,” said Foley, pointing to the standoff in the United States over the debt ceiling, slowing US and eurozone growth, and Tuesday’s weak Chinese economic data.

“With all of that, do you really want to buy a lot of risky assets this year?” Foley said.

US President Joe Biden expressed confidence that a deal could be done in time for an expected meeting with congressional leaders later on Tuesday. However, Republican House of Representatives Speaker Kevin McCarthy said the two sides were still far apart.

The weak Chinese data was also weighing on the Australian dollar which dropped as much as 0.5 per cent to $0.6665.

“The Aussie’s upside looks to have been capped for some time by investor concerns over China’s outlook,” said Sean Callow, a senior FX strategist at Westpac.

“Today’s data will set the Aussie back on its heels,” he added, predicting that the currency could ease to around 0.6645, the lower limit of its recent trading range.

The euro was at $1.0892, ticking up in early European trading, and the yen, which had been hit by a wider spread between US and Japanese long-term yields, pulled itself off a nearly two-week low.

The dollar lost 0.16 per cent to 135.87 yen.

The dollar also gained on China’s offshore yuan , rising to as much as 6.9795, its highest since March 10.