Sterling rolled back against the US dollar on Tuesday as currency traders mulled the prospect of interest rates being kept on hold next month.
The pound was down 0.5% versus the greenback at 1.31 despite Bank of England Governor Mark Carney telling MPs that a rate hike may be needed over the coming months to tackle surging inflation.
The UK currency was 0.1% lower against the euro at 1.12 when the London market closed, with the FTSE 100 Index drifting 10.80 points lower at 7,516.17.
It came despite sterling showing little movement earlier in the session when the latest slew of economic data showed inflation in September had surged to its highest level for more than five years.
Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation reached 3% last month, rising in line with expectations from 2.9% in August.
The step-up in CPI was driven by higher food and transport costs, pushing the headline rate to levels not seen since April 2012.
Neil Wilson, senior market analyst at ETX Capital, said: “Sterling lost ground as the market decided the Bank of England is no longer definitely minded to hike rates in November.
“Mark Carney suggested tightening may be warranted in the coming months and failed to give an explicit signal on November, while Dave Ramsden sounded overtly dovish.
“Some sterling bulls threw in the towel but this looks a trifle cautious – while not nailed on the hawks should edge it next month.”
On European markets, the Cac 40 in France was marginally lower and Germany’s Dax dropped by 0.1%.
In oil, Brent crude sunk by 0.9% to 57.37 US dollars a barrel, retreating from Monday’s gains when the conflict between the Iraqi government and the Kurds around the city of Kirkuk threatened to disrupt supply.
Focusing on UK stocks, Merlin Entertainments saw its share price plunge 15% after the Alton Towers and London Eye owner suffered during peak trading.
The firm’s latest trading figures confirmed a “difficult” summer for its London attractions and UK theme parks after a spate of terrorist attacks, which saw group like-for-like revenue growth almost grind to a halt, edging up 0.3% in the 40 weeks to October 7.
Poor late summer weather across the UK and Northern Europe and extreme weather in Italy and Florida were also to blame, according to Merlin.
Shares were down 71.7p to 378p.
On London’s junior market, shares in online retailer ASOS rose by nearly 1% following a surge in full-year profits.
The AIM-listed firm saw shares climb 50p to 5,750p after it clocked a 33% rise in revenues to £1.9 billion in the year to August 31, with pre-tax profits growing 145% to £80 million.
On a constant currency basis, sales rose 27% and, stripping out exceptional items, pre-tax profits rose 26%.
The biggest risers on the FTSE 100 Index were Pearson up 45.5p to 667p, Convatec up 8p to 213p, International Consolidated Airlines Group up 16.5p to 635.5p, easyJet up 28p to 1,316p.
The biggest fallers were Merlin Entertainments down 71.7p to 378p, Mediclinic International down 29.5p to 645.5p, Standard Life Aberdeen down 17.3p to 429p, 3I Group down 28p to 940p.