The pound fell to a two-month low on Wednesday after weaker-than-expected British inflation data gave the Bank of England room to cut interest rates more aggressively, while the euro hit a 10-week low ahead of a European Central Bank meeting.
The pound fell as low as $1.2984, below $1.30 for the first time since August 20, after data showed the annual consumer price inflation rate fell to 1.7% in September from 2.2% in August.
The reading was the lowest since April 2021, and lower than the 1.9% forecast by a Reuters poll of economists. It strengthened expectations for a BoE interest rate cut next month and made the potential for further cuts in December more likely.
Sterling recovered slightly in morning trade in Europe and was down 0.42% on the day at $1.3018.
"This data clearly gives a dovish signal for the Bank of England and paves the way for a rate cut at the remaining two meetings this year," said Francesco Pesole, FX strategist at ING.
"We think this coincidentally opens the door for a weak performance for sterling," he added, noting they saw the pound trading well below $1.30 and the euro above 84 pence.
The common currency was last seen 0.44% higher against the pound at 83.67 pence.
Movements elsewhere were less dramatic but the euro was at $1.0891, steady on the day but stuck at its lowest level since August 2, as traders discounted expectations of a rate cut by the Federal Reserve and factored in the possibility of former President Donald Trump's victory - seen as a positive for dollars – in their judgment.
Investors will focus on the European Central Bank's meeting on Thursday, but if policymakers implement an expected 25 basis point rate cut and President Christine Lagarde does not give too many hints about the future rate outlook, the market impact may not be significant.
Market players have placed a 92% chance of a rate cut of 25 basis points when the Fed makes a policy decision on Nov. 7, with an 8% chance of no change, according to CME Group's FedWatch Tool. A month ago, the market saw a greater than 29% chance of a super rate cut of 50 basis points.
Market prices are still leaning toward a total reduction of 50 basis points this year, but comments from the central bank overnight indicated a hawkish bias. Raphael Bostic of the Atlanta Fed said he planned just one rate cut of 25 basis points this year, while Mary Daly of the San Francisco Fed said "one or two" cuts in 2024 were "reasonable".
The US Dollar strengthened 0.1% to 149.37 yen, not far from Monday's high of 149.98 yen, the highest since August 1.
BOJ board member Seiji Adachi said on Wednesday that the central bank should raise rates at a "very moderate" pace and avoid a hasty hike, given uncertainty over the global economic outlook and domestic wage developments.
The Australian and New Zealand dollars fell as doubts grew over stimulus from key trading partner China.
The Aussie slipped as much as 0.51% to $0.6669, its lowest since September 12, before recovering to $0.6684, while the Kiwi slipped 0.69% to $0.6041, a low last seen on August 19.
New Zealand's currency was also further pressured by data showing slowing inflation, opening the door for more aggressive easing by the central bank.
