Sterling fell on Tuesday, retreating from a one-month high against the euro, hurt by soft economic data and a wave of risk aversion that swept global markets and which saw traditional safe-haven currencies and assets gain. Data released on Tuesday showed Britain's public finances deteriorated unexpectedly last month, recording their worst August in three years, while industrial orders also declined, signalling a global slowdown was hitting the economy.
Sterling fell 0.7 percent against the dollar to trade at $1.5403, while the euro was up 0.3 percent at 72.35 pence, recovering from a one-month low of 71.97 struck earlier in the day.
The euro has performed well at times of risk aversion in recent months, hitting a 3 1/2-month high against sterling in late August after Chinese share prices plunged following a devaluation of the yuan.
"A risk-off trading environment and extended financial volatility has continued to punish sterling," said Lukman Otunuga, analyst at FXTM.
"Regardless of this weakness experienced by the pound, the outlook for the UK economy remains robust and even though investor sentiment is clearly shaky as of now, this may subside with time."
Indeed, sterling has been bolstered of late by expectations that the Bank of England will eventually follow the Federal Reserve in raising rates in contrast to likely action by the European Central Bank.
The ECB has come under pressure to take a looser stance after the Fed left interest rates unchanged at its policy meeting last week, analysts said. A Fed rate increase would have supported the European economy by weakening the euro against the dollar.
"Given that UK and US rates are highly correlated as the market perceives Fed's and the BoE's tightening cycles as synchronised, sterling has been benefiting from the spillover effects of the market assigning a higher probability to the Fed rate hike this year," said Petr Krpata, strategist at ING.
Most analysts reckon the BoE will wait to raise rates until the Fed moves and many think it will not be far behind.
Last week, data showed British wages increasing at their fastest rate in over six years, keeping alive expectations that the BoE will tighten policy around the middle of next year, though inflation fell back to zero.