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Wednesday in Asia, the pound plunged to fresh multi-month lows against its European and Swiss counterparts as the Bank of England Governor Mervyn King said yesterday that the central bank was considering cutting the rate paid on reserves of financial institutions to encourage lending.
The pound also showed weakness against the currencies of the U.S. and Japan.
In testimony to a Treasury committee, King said the "strength and sustainability of the recovery is highly uncertain. He also said it would be "sensible" to cut the rate at which banks reserves are remunerated.
The possibility of lower bank reserve rates bolstered the view that U.K. lending rates will remain at a record low of 0.5 percent for some time as the BoE keeps buying domestic assets from the market to boost liquidity and stimulate the economy.
Last week, the BoE had decided to maintain its interest rate at a record low of 0.5% and also voted to continue the GBP 175 billion asset purchase programme using central bank reserves. Policymakers expect the asset purchase programme to take another two months to complete.
Britain, facing a general election by next June, is struggling to pull out of its deepest recession since World War Two. King said he saw some positive signs.
"Falls in output have broadly come to an end and we are beginning to see some very small signs of positive growth," King told parliament's Treasury Committee.
"It is important to remember that the very small positive growth rates or small falls in output in other countries in the second and possibly third quarters are really very small in comparison with a sharp fall in output that took place at the end of last year and beginning of this," he added.
At a Treasury Committee hearing, he said inflation is likely to be volatile over the coming six months, initially falling further below the 2% target, before rising above the target.
The latest report from the Office for National Statistics showed yesterday that annual inflation eased to 1.6% in August, the lowest since January 2005. Inflation held below the 2% target for the third straight month.
On a monthly basis, consumer prices rose 0.4% in August, slightly bigger than the expected 0.3% rise.
The pound, which closed yesterday's trading at 1.7067 against the Swiss franc, slipped 1.7017 in Asian deals on Wednesday. This set the lowest point for the pound since May 18.
The pound has been steadily weakening against the franc since it reached a 5 1/2 -month high of 1.8121 on June 24. Thus far, the pound-franc has dropped more than 6%. If the pair slides further, 1.665 is seen as the next target level.
During Asian deals on Wednesday, the pound fell to a new 4-month low of 0.8919 against the euro. The next downside target level for the pound is seen at 0.904. At yesterday's close, the euro-pound pair was quoted at 0.8894.
The euro gained 0.7% against the pound yesterday as a report showed that the German investor confidence rose in September to its highest level in more than three years.
The economic sentiment indicator rose to 57.7 points in September, the highest reading since April 2006, from 56.1 points in August, the Centre for European Economic Research or ZEW said. Economists had forecast a reading of 60 for the month. The current figure stood well above the indicator's historical average of 26.6 points.
Overall, the pound has lost 6% against the euro after it reached a 5 1/2 -month high 0.8403 on June 22.
Against the Japanese yen, the pound declined to 149.76 in Asian deals on Wednesday. On the downside, 149.1 is seen as the next target level for the pound. The pound-yen pair was worth 150.17 at yesterday's New York session close.
The Bank of Japan began its two-day monetary policy meeting today in Tokyo. The bank will announce its decision on interest rates tomorrow, with analysts widely expecting the bank to keep rates on hold at a record low 0.10 percent.
The pound-yen pair depreciated 6% in August and plunged to a 1 1/2 -month low of 149.09 on September 02. Thereafter, the pound-yen attempted to reverse direction, but it weakened again on September 07. Since then, the U.K. currency has lost more than 2% and fell to a 12-day low of 149.52 yesterday.
In Asian deals on Wednesday, the pound plummeted to 1.6454 against the U.S. dollar. If the pound-dollar pair slips further, it may target the 1.641 level.
The pound-dollar pair fell to a 1-week low of 1.6406 in New York morning deals yesterday. That was down 2% from a 5-week high of 1.6744 hit on September 11.
However, the pound recouped its losses in the New York afternoon deals yesterday and closed the day's trading at 1.6491 against the dollar.
Traders now look forward to the European session, in which the Swiss retail sales for July and the ZEW survey report for September, Italian CPI for August and current account for July, Euro-zone August CPI and the U.K. job market reports for August are expected to influence trading.
From the U.S., the consumer price index for August is scheduled to be released at 8:30 am ET. The consensus estimates call for a 0.3% increase in the headline consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.
The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for July at 9 am ET.
At 9:15 am ET, the industrial production report of the Federal Reserve is due out.
The National Association of Homebuilders is scheduled to release the results of its survey on homebuilders' confidence at 1 pm ET.
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