15/10/2014 08:43 AST
LONDON: Sterling fell to a one-month low against the euro and headed towards its lowest against the dollar since last November after UK inflation slowed more than expected, pushing back expectations of a rise in UK interest rates well into 2015.
UK consumer prices rose 1.2 percent on the year in September, compared with 1.5 percent in August, as the prices of food and motor fuels both fell, the Office for National Statistics said.
Sterling fell 0.8 percent, dropping to a low of $1.5955 , its lowest in a week and not far from an 11-month low of $1.5943 it reached earlier this month.
The euro rose 0.25 percent to 79.56 pence, its highest level in four weeks. The single currency gave up some of its gains after weaker-than-expected euro zone industrial data and a disappointing German ZEW survey.
Against a trade-weighted basket of currencies, sterling hit a one-month low of 86.7, after the softer-than-expected UK inflation pushed back expectations of a rate hike by the Bank of England into the summer of 2015.
Sterling overnight interbank average rates - the short-term interest rates which form the basis of lending costs to the wider economy - were pricing in a chance of a rate increase in eight months, compared with six months before the data was released.
"Sterling is likely to underperform in the near term as rate hike expectations get pushed back," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"We certainty are not there, but more evidence of wage growth slowing and any nasty surprises from the jobs market could see rate hike expectations getting pushed back to 12 months."
Expectations that the BoE will be the first major central bank to raise rates drove sterling to a six-year peak against the dollar in July. But with UK wages showing little signs of rising, the housing market cooling and economic activity moderating, the prospect of an end-of-year slowdown in the UK has grown considerably.
BoE Governor Mark Carney displayed a slightly more dovish stance on Monday, saying the monetary policy committee will have to take into account "a more modest global recovery, particularly if that's the case in Europe" and "a benign global inflationary environment."
Investors are also wary about political risks in Britain that might have a bearing on investment flows and the pound.
Latest polling showed growing support for anti-EU party UKIP, and the party's leader said he would demand an immediate referendum on European Union membership as the price of supporting any coalition government after elections next May.
"We believe the risks of a constitutional crisis around the May general election is under-appreciated," said Jonathan Webb, head of currency strategy at Jefferies.
"If the UK economy continues to be strong, these risks are much diminished, but recent weaker global growth does not bode well," he said, adding there were downside risks for sterling, especially against the dollar.
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