Sterling dipped against the dollar and the euro on Tuesday after lower-than-expected UK inflation figures supported the view that the Bank of England is likely to cut interest rates, not raise them.
Britain's annual inflation rate declined to 2.1 percent in November, its weakest rate in five months, from 2.3 percent in October and was below the 2.2 percent forecast. The figure was still above the central bank's target of 2 percent.
"For a central bank nervous about second-round effects from higher energy prices, this report should provide much comfort. All of which reopens the possibility of an interest rate cut in early 2006," wrote Daragh Maher, a senior foreign exchange strategy at Calyon in a note to investors.
By 1445 GMT, the pound was down 0.32 percent against the dollar at $1.7699, after falling as low as $1.7661. It was steady at 67.38 pence per euro, paring an earlier drop to 67.49 pence.
The bank's Monetary Policy Committee last cut the repo rate by 25 basis points to 4.5 percent in August.
"The MPC has been very focused on the fact that headline inflation is above their target right now," said Marvin Barth, global currency economist at Citigroup. "Today's data ... should alleviate a lot of those concerns."
But Lena Komileva, G7 market economist at Tullett Prebon, was less convinced that the inflation numbers would give much of a push to lower rates.
"Given that the monthly decline was dominated by volatile factors such as oil prices and airfares, which concealed strength in other core price sectors, the implications for monetary policy are probably less apparent," she wrote in a note to investors.
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