LONDON: Sterling fell against both the euro and the dollar on Tuesday, coming under pressure as support for Scottish independence rose dramatically with less than three weeks to go before a referendum that poses considerable risk for the currency.
A poll for the Sun and the Times newspapers showed support for the pro-independence "Yes" campaign had risen to 47 percent, a four point gain since mid-August and up eight points since the start of the month.
The lead of the "No" campaign to reject independence has slumped to 6 points from 22 points at the start of August.
The currency is centre stage in the Scottish referendum debate. Pro-independence leader Alex Salmond intends to share the pound while Westminster has been sceptical about such a deal, leading to some uncertainty.
Sterling dropped to $1.6554 against the dollar, down 0.25 percent on the day.
Even the euro, which has been struggling due to expectations of further monetary easing from the European Central Bank, edged up 0.3 percent to 79.24 pence in London trade.
"Sterling which is coming under a little pressure following the most recent Scottish referendum poll which showed a significant narrowing of opinions, giving the Yes campaign a boost," said Angus Campbell, senior analyst at FxPro.
"Sterling is heading lower...and will be one to keep an eye on as Sept 18 approaches."
The cost of hedging against sharp swings in the British pound in the near term also rose as speculators sought to insure against the risk of Scotland leaving the United Kingdom.
The one-month sterling/dollar implied volatility rose to around 5.45 percent, from around 4.85 percent on Friday. One-month risk reversals, a gauge of demand for options on a currency rising or falling, showed a greater bias for sterling weakness than a month ago. Part of the reason for bearish bets is also due to a slight unwinding of interest rate hike expectations in recent weeks.
Data has shown that economic activity is moderating in the UK and is likely to cool expectations of rate hikes further.
Data on Monday showed factory orders rose at the slowest pace in more than a year and the Markit/CIPS UK Manufacturing Purchasing Managers Index (PMI) dropping to its lowest level since June 2013.
On Tuesday, the construction sector PMI is due at 0830 GMT.
"A similarly disappointing August construction PMI number today is likely to pull the sting from the argument for higher rates in the short term, particularly after yesterday's poor manufacturing numbers," CMC said in a note.
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