RTRS:Sterling hits two-month low vs. dollar after UK inflation surprise
(Reuters) - Sterling fell to a two-month low against the dollar and a one-week trough against the euro on Tuesday after UK inflation for October fell more than expected.
The soft inflation reading will give ample room to the Bank of England to keep monetary policy accommodative and investors responded by pushing back bets on the chances of a rise in interest rates before the end of 2015.
Sterling overnight interbank average rates now price in a 35 percent chance of a rate hike in two years, down from around 44 percent on Monday.
Consumer price inflation fell to an annual rate of 2.2 percent in October from 2.7 percent in September, well below economists' forecasts of an average drop to 2.5 percent and the lowest rate since September 2012.
"Inflation is now sitting closer to the BoE's target of 2 percent, which will perhaps help ease market expectations for an early rate hike," said Alex Edwards, head of corporate desk at UKForex.
Sterling dropped to $1.5854 from $1.5920 before the data. It was down 0.8 percent on the day and its lowest level since September 13.
Still, analysts expect the pound's struggle against the dollar to continue after strong U.S. jobs data on Friday increased the chances of the Federal Reserve scaling back stimulus in the coming months, boosting the dollar.
That, and the European Central Bank's move last week to cut interest rates, stands in stark contrast to the debate in Britain which is focussed clearly on when the BoE will raise rates for the first time.
On Wednesday the central bank publishes quarterly growth and inflation forecasts. Many have predicted it will bring forward the point at which it sees unemployment hitting 7 percent - the level at which it would consider raising rates.
"Price pressure is definitely weakening, which is obviously weighing very heavily on sterling. We expect a short-term tight range with a bearish bias - between $1.5850 and 1.5920-30 on the upside," said Kathleen Brooks, research director at Forex.com.
Sterling also retreated from a recent 10-month high against the euro. The single currency rose to a one-week high of 84.375 pence after the data from 84.01 pence beforehand.
