LONDON: Sterling fell by as much as half a cent against the dollar on Tuesday after UK headline inflation came in at zero for the second month running, while other price indicators were marginally softer than expected.
Weak inflation is one of the main barriers standing between the Bank of England and an early rise in interest rates, and doubt about the bank's ability to move before the middle of next year have hurt the pound.
The Office for National Statistics said consumer prices rose 0.2 percent between February and March, but compared with a year earlier they were unchanged.
If the change was calculated to two decimal places, however, prices were 0.01 percent lower than a year before, which would be the first fall on record in consumer prices on that measure.
"A depressed inflation backdrop and lingering political uncertainty continue to buffer the pound's policy risk premia, making long-sterling calls unattractive," said Lena Komileva, a markets economist with G+ Economics in London.
Sterling has also been battered by concerns over May's parliamentary elections. It fell to a five-year low of $1.4567 on Monday before recovering on signs the Conservative party was gaining in the polls. By 0944 GMT it was trading at $1.4644, down 0.2 percent on the day. It was similarly weaker at 72.185 pence per euro.
Investors have been betting for months that the polls on May 7 would lead to large swings in the value of sterling, as the strength of smaller parties makes it hard to predict not only who will win but also whether a stable government can be formed.
Many traders in London's traditionally right-leaning City say a Labour-led government would be a negative. But many foreign investors worry as much about the prospect of a weak administration that might be unable to deal with Britain's twin deficits, or about the Conservative promise to hold a referendum on whether Britain should stay in the European Union or leave.
Analysts from one of the currency market's big banking players, HSBC, argued in a note on Tuesday that there was already a big political premium priced into sterling.
"Sterling should be trading closer to $1.55 based on the interest rate differential but instead is around $1.46: a 6 percent political discount," they said.
"Investors seem to have learnt from their experience with the Scottish Referendum back in September, where political risk was largely ignored, with nothing in the price until two weeks before the vote. This time around the market has been acutely aware of political risk."
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