Sterling fell versus the dollar and euro on Tuesday after worse-than-expected UK construction data added weight to speculation the Bank of England may resort to more stimulus measures in the near term to boost the flagging economy.
The pound also came under pressure along with other riskier assets on signs greater losses were in store for banks with exposure to Greece's debt crisis.
The UK Markit/CIPS construction PMI headline activity index fell sharply to 50.1 in September from 52.6 in August, its lowest reading in 10 months and worse than forecasts of a drop to 51.5.
Sterling dropped to a session low of $1.5378 before paring some losses to last trade down 0.2 percent at $1.5385 . A break below support at $1.5326 would push the UK currency to a 13-month low. Sterling fell to $1.5326 on Sept 22 -- its lowest since early September 2010.
Earlier in the session, traders said there was interest to buy sterling around $1.5400/10 from Eastern European names and Asian sovereigns.
"Any individual piece of data that reinforces the message the economy is not in fantastic shape and points to the Bank potentially implementing further (quantitative easing) will get a negative response from the currency," said Michael Derks, chief strategist at FX Pro.
"The extraordinary risk aversion we continue to see in the equity and commodity markets also contributes to the case for more monetary easing."
Sentiment towards sterling has soured markedly in recent weeks on expectations more QE easing may be needed to revive the flagging economy. Another round would flood the market with the UK currency, reducing demand.
After finance minister George Osborne said on Monday he would support any such move, some investors speculated that the Bank of England could announce more easing as early as this week, although November is still seen as a more likely date.
The BoE announces its rate decision on Thursday. Analysts said speculation about more QE would continue to swirl, and a weak services sector PMI reading on Wednesday would fuel the debate.
POTENTIAL DOUBLE BOTTOM
The euro climbed versus sterling following the release of the construction PMI, and was last up 0.5 percent at 85.80 pence . It recovered from a session low of 85.34 pence.
The single currency came under heavy pressure earlier in the session after euro zone policymakers failed to quell mounting fears of a Greek default, sending bank shares tumbling.
Market players said the euro bounced off strong support around 85.31 pence, the low hit on both Sept. 12 and Oct.3. That level appears to be forming a potential double bottom, which will be confirmed if the euro continues to climb.
A break below there would take euro/sterling to a seven-month low, while technical analysts said the 200-week moving average at 85.05 was key support below there.
"Euro/sterling has dropped quite a lot in the last 10 days and those positions were starting to look quite stretched," said Ankita Dudani, G10 currency strategist at RBS.
Dudani said the European Central Bank rate decision, also due on Thursday, could support the single currency if the ECB is less dovish than expected. Some in the market are speculating it may cut rates by 25 basis points and boost liquidity measures.
read more: Olympus Wealth Management
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