Sterling fell more than half a percent against the dollar on Tuesday as news of a surprise fall in British inflation bolstered expectations that interest rates would not go up again this year.
Britain's Consumer Price Index dropped to 1.1 percent in September, its lowest in six months and well below consensus forecasts of a rise to 1.4 percent.
Sterling fell across the board after the data, which reinforced a growing view that Britain's central bank would keep its powder dry in the coming months after five interest rate rises in the past year.
"The inflation data gave a very dovish signal on interest rates which has put pressure on sterling," said Daragh Maher, senior currency strategist at Calyon.
By 1415 GMT, sterling was down 0.55 percent on the day at $1.7878, just above session lows.
The pound fared slightly better against a broadly-weaker euro at 68.84 pence little changed from the New York close but less than half a penny away from eight-month lows hit last week.
Investors were awaiting a speech by Bank of England Governor Mervyn King later on Tuesday and UK employment and earnings data on Wednesday for further clues on whether UK interest rates have peaked in the current cycle.
"The question is have rates already peaked in the UK? We now think they have," said Richard Iley, economist at BNP Paribas, who changed his rate forecast on Tuesday.
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