LONDON: Sterling hit a two-month low against the dollar on Monday as investors stepped up selling of the pound after last week's slight easing of UK monetary policy.
The pound fell 0.1 percent on the day to $1.5880, its lowest level since Sept. 5.
Against the euro, sterling was close to flat on the day at 79.94 pence, with traders citing corporate demand for pounds. Euro support was expected around its 100-day moving average of 79.63 pence, a level that limited losses last week.
Investors were caught off guard on Friday when the British government said it would use revenue from the BoE's bond-buying programme to reduce short-term debt issuance.
Although the move is likely to help finance minister George Osborne meet his deficit reduction targets, the pound fell after BoE Governor Mervyn King said it equated to modest monetary loosening.
"Today's move should be a follow through of Friday's BoE measure. It does represent an easing of monetary policy," said Adam Cole, global head of FX strategy at RBC Capital Markets, adding sterling was likely come under pressure.
Gains against the dollar were also likely to be capped by concerns surrounding the looming U.S. fiscal cliff of tax hikes and spending cuts that are due to come into effect in January, and could see safe-haven flows into the dollar.
The main focus for sterling investors this week will be the Bank of England quarterly Inflation Report on Wednesday.
Analysts said the report may indicate the possibility of further asset purchases in future, which could knock the pound. Asset purchases tend to weigh on sterling as they increase the currency's supply.
"We expect the Monetary Policy Committee's (MPC) projections to maintain a dovish bias similar to those in previous reports," Barclays told clients in a morning note.
No UK data is scheduled for release on Monday. On Tuesday October inflation figures will be released, and are expected to show the annual rate of consumer inflation rising slightly to 2.3 percent from 2.2 percent the previous month.
