Sterling hit a two-month low against the euro and a one-month low versus the dollar on Tuesday after data showed that UK consumer price inflation slowed in April, tempering some of the market's expectations on how high interest rates are headed.
Consumer prices rose 0.3 percent on the month and 2.8 percent on the year, both as expected, which brought the annual rate down from 3.1 percent growth in March.
The unexpectedly high March figure had sent sterling soaring to 26-year highs versus the dollar beyond the psychologically key $2 level, and forced Bank of England governor Mervyn King to write an explanatory letter to the Chancellor. The BoE raised rates last week to a six-year high of 5.5 percent, the highest in the Group of Seven industrialised nations.
"The inflation figures indicate that cracks are starting to appear in the outlook for sterling," said Ian Stannard, senior foreign exchange analyst at BNP Paribas. "The market was speculating there may be back-to-back rate hikes with a further rise in June, but the outlook has eased and the market is now expecting a hike later in the year."
At 1415 GMT the euro was up 0.1 percent at 68.47 pence, coming back slightly off a two-month high of 68.56 pence struck after the CPI data. Above-consensus first quarter eurozone growth figures also supported the euro across the board. The pound edged lower on the day versus the dollar to $1.9780, recovering from an earlier dip to a new one-month low of $1.9749.