LONDON: Sterling hit a 6-1/2-year low against a basket of currencies on Tuesday, as traders awaited inflation data to see the impact of a weaker currency on domestic prices after June's shock vote to leave the European Union.
Economists expect headline consumer price inflation for July to show a reading of -0.1 percent month-on-month, down from 0.2 percent in June. For the year, inflation is expected unchanged at 0.5 percent. Core inflation, which strips out volatile items, is also expected to be subdued.
Sterling was down 0.4 percent at 87.15 pence per euro , having hit a three-year low of 87.20 pence. Against a generally weaker dollar, it was a touch higher at $1.2915.
The trade-weighted sterling index was down 0.1 percent at 76.8 having shed over 12 percent since June 23, when Britain voted to leave the European Union in a referendum. The index was its lowest since March 2010, Reuters graphics showed.
Analysts said even a surprisingly strong inflation reading would not change the Bank of England's easy monetary policy outlook. A lower currency tends to push up prices of imported goods, but the BoE has said it will tend to look through this while deciding policy.
"While the fall in trade-weighted sterling runs the risks of a sharp inflation acceleration in the months ahead, for now the fall in oil prices and aggressive discounting in shops are helping to keep inflation contained," said Petr Krpata, currency strategist at ING.
"Even if we don't see immediate evidence of rising prices, to which the BoE is unlikely to react, the general negative sentiment towards sterling is likely to persist."
Data on Friday showed speculative positions against sterling and in favour of the dollar reaching their highest on record - pointing both to further sterling weakness but also to a risk that those positions at some stage get squeezed.
Traders said there had been signs of some longer-term "real money" - major institutional players like pension and investment funds - selling the pound, despite the indications that bets against the currency look stretched.
"Our metrics highlight positioning in sterling is increasingly stretched. However, we think the process of post-referendum adjustment in the pound still has further to go, particularly against the dollar, and expect it at $1.24," BNP Paribas said in a note.
The pound has been falling steadily since the BoE launched a new round of monetary easing two weeks - which should spur buying of UK government bonds but has also driven market interest rates for holding sterling lower.
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