Sterling tumbled by 3 percent against the dollar and the euro on Monday, hit by a Moody's downgrade on Barclays, weak UK data and the prospect of another Bank of England interest rate cut this week.
The pound handed back a chunk of last week's steep rise against the dollar, its biggest in over 20 years, as risk aversion gripped markets, sending stocks lower and weighing on sterling and other high-risk units.
Renewed worries about the health of the UK banking sector sent the currency lower after Moody's rating agency cut the credit ratings of UK bank Barclays , causing its share price to tumble 11 percent.
The falls helped push the FTSE 100 share index down around 1.3 percent as worries over the global economy and company earnings deepened.
The purchasing managers' survey for UK manufacturing showed the main index rose to 35.8 in January from 34.9 in December, beating expectations of 34.5 but still revealing a deep contraction in activity.
"The outlook for sterling remains one of weakness," Bank of America currency strategist David Powell said.
"The data was not any worse than expected but the overall tone was still negative for the currency," he said.
Traders also cited large orders in euro/sterling by a major UK bank, as well as thin liquidity conditions helping to exaggerate movements as heavy snowfall meant many traders failed to make it into work.
At 12:30 p.m., the pound had fallen to a session low of $1.4053 against the dollar, down from last week's high of $1.4527. The euro rose 3 percent to 90.68 pence, after tumbling to its lowest since mid-December on Friday of just above 88 pence.
Trade-weighted sterling also resumed its losses, falling to 77.2.
Last week, trade-weighted sterling had its second best week in over a decade, while the euro suffered its second biggest fall against the pound since the euro's inception.
"Last week's drop in euro/sterling was a bit of an overshoot," Bank of America's Powell said.
The Bank is scheduled to announce its latest interest rate decision on Thursday, with market participants expecting another cut of 50 basis points to a new historic low of 1.00 percent.
The European Central Bank also holds a policy meeting this week but its policymakers have already signalled that the next move in rates, now at 2.0 percent, will not come before March.
With UK rates already 50 basis points lower than those in the euro zone and set to drop further on Thursday, the potential for a growing rates differential helped push sterling lower.
"Sterling's downside this week will depend on how much of a BoE rate cut the market will factor in," CMC Markets analyst James Hughes said.
Bank of America's Powell said the market was pricing UK rates to bottom out at 0.75 percent, and any sign that the BoE could opt to take rates as low as the zero-0.25 percent in the U.S. would put more pressure on the currency.
(Reporting by Jessica Mortimer; additional reporting by Naomi Tajitsu; editing by Patrick Graham)
