LONDON: Sterling fell to a six-week trough versus the euro and a three-week low against the dollar on Tuesday after data showed UK annual inflation slowed in November to its lowest in four years.
The data gives some breathing space to the Bank of England to keep interest rates low to support recovery. Markets, as reflected in the sterling overnight interbank average rates, priced in the chance of a first hike in two years.
Sterling fell to $1.6240 by afternoon trade, down from around $1.6315 before the release, and down 0.4 percent on the day. It sidestepped robust data from the Confederation of Business Industry which showed British factory orders and output growing at their fastest pace in more than 18 years last month.
It also fell against the euro, which rose 0.2 percent to 84.67 pence, a 1-1/2 month high. The euro was also bolstered by better-than-expected German ZEW analyst and investor sentiment data.
"The downside for sterling/dollar could be limited in the lead up to the Fed meeting," said Kathleen Brooks, research director at Forex.com.
"The next key levels of support are at around $1.6200 - the Nov. 27 low, then $1.6160 - the 50-day moving average. Whether or not we see further sterling losses could depend on the outcome of the Fed meeting."
The Federal Reserve begins its latest two-day policy meeting on Tuesday. A majority of economists polled by Reuters expects it to taper its $85 billion per month bond-buying programme in March, although the odds on a move this month or next have shortened after a run of upbeat data.
Some traders said that if the Fed started to taper this week the pound could drop below $1.62.
Sterling has picked up against the dollar and the euro in the second half of the year as better-than-expected UK economic data prompted expectations that interest rates would rise earlier than flagged by the BoE in its forward guidance.
The BoE had said in August that it would not raise rates until unemployment fell below 7 percent, something it expected to happen by the end of 2016. It has since said that level could be reached much earlier, though it has pledged to keep rates low for longer.
A report on Wednesday is expected to show further signs of a pick-up in the labour market.
"Tomorrow's labour market report has the potential to provide some positive news. A move above $1.6360 would generate a positive signal, while a move below the $1.6260 level would open the way for a more significant correction of recent gains," Morgan Stanley said in a note.
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