LONDON: Sterling fell to a four-month low against the dollar and slipped towards a two-month trough versus the euro on Tuesday, after data showed British inflation fell more than expected and eased pressure on the Bank of England to raise interest rates.
Consumer prices rose 1.6 percent on the year in July, the Office for National Statistics said. Economists taking part in a Reuters poll had expected inflation to fall to 1.8 percent from 1.9 percent in June. Month-on-month, the consumer price index fell 0.3 percent.
The pound fell to $1.6634 after the data, its lowest since April 8, from around $1.6690 beforehand. It has now shed 3.3 percent since it hit a six-year high of $1.7192 on July 15, as investors unwound rate hike expectations.
Sterling was among the worst performing actively traded currencies and chartists said if it closes below its 200-day moving average of $1.6675 on Tuesday, it could mean more losses in store.
The euro rose 0.4 percent to 80.25 pence from around 79.90 pence before the numbers were released. The single currency struck a two-month high of 80.37 pence last week after a Quarterly Inflation Report from the BoE that was perceived as dovish.
After that report was released, Governor Mark Carney said rates were unlikely to rise until wages picked up, although he moderated those comments in an interview to a newspaper at the weekend.
But the latest consumer inflation data, which showed that inflation was well below the BoE's target of 2 percent, added to expectations that rate hikes were likely only in the first quarter of next year.
"With dovish comments from BoE Governor Mark Carney last week, this fall in inflation will provide the monetary policy committee with even more reason to hold out for first-quarter 2015 before tightening monetary policy," said Jake Trask, corporate dealer at UKForex.
Sterling had been the best performer by far among major currencies in the year to the start of July, pushed up by expectations the BoE might start raising interest rates to cool the economy as early as November.
But those expectations have now been pushed back despite robust growth data. While demand has picked up, the data did little to quell doubts over whether the growth was generating any upward pressure on wages.
Along with signs that the housing sector is cooling and uncertainty caused by an impending Scottish referendum on independence, some analysts said sterling's gains would be muted.
"Should tomorrow's BoE meeting minutes paint a similar picture to today's inflation news, losses for the pound may continue in August," said Nawaz Ali, analyst at Western Union.
Minutes from the latest monetary policy meeting are due Wednesday and there is speculation that the meeting might have seen the first dissenting vote in favour of a rate hike.
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