Sterling hit a one-month low against the euro on Tuesday after weaker-than-expected British inflation data trimmed expectations that the Bank of England might raise interest rates beyond the current 5.00 percent.
The Office for National Statistics said consumer prices rose 0.2 percent last month, keeping the annual rate of inflation steady at 2.4 percent. Analysts had expected an acceleration to 2.6 percent. Analysts interpreted the data as meaning the BoE could be in no hurry to increase borrowing costs further in February after hiking by 25 basis points last week.
"We are seeing some euro/sterling buying after the soft UK inflation numbers. They were on the soft side of expectations, so it leaves the February rate hike still in the balance," RBC senior currency strategist Adam Cole said.
By 1520 GMT, the euro was around a one-month high at 67.63 pence. It had earlier jumped against the dollar after weaker-than-expected US producer price data, although it faded in afternoon trading.
Sterling fell sharply against the dollar to a one-week low of $1.8950, down around 0.3 percent on the day. The BoE had predicted inflation would rise when it last raised borrowing costs, and economists said any further hikes would depend on whether rising prices triggered inflationary wage demands.
Still, although it was below analysts expectations, CPI was still above the BoE's target of 2.0 percent. "It is far too soon for the Bank of England to relax in the war against inflation and the Bank will remain very much on its guard," Howard Archer, economist at Global Insight said.