LONDON Sterling skidded below $1.31 on Friday after strong U.S. inflation data, leaving it on track for its weakest week in 10, as investors worried about Britain's vote to leave the European Union and bet on another cut in UK interest rates this year.
The Bank of England kept rates at their record lows on Thursday but signalled that it would cut them again before the end of the year. It cut rates to 0.25 percent in early August and relaunched an asset-purchase programme to cushion the economic blow from Brexit.
Since then, though, economic data pointed towards a less significant hit to the British economy than had been expected. That helped lift sterling to a seven-week high of $1.3445 last week, more than 5 percent above the three-decade low it had plumbed in the aftermath of the vote.
But with the British parliament back in session and focus returning to the uncertainty surrounding the UK's negotiations to leave the bloc as well as the prospect of further monetary easing, sterling has since slipped almost 3 percent.
Sterling hit a two-week low of $1.3092 on Friday, down 1.1 percent on the day and down 1.3 percent on the week - its softest performance since early July.
"Whereas a month ago the market was in a phase of relief that the impact of the referendum hadn't been that big after all ... I think there is now more of a focus on the fact that Brexit hasn't actually begun yet, and there could still be a rocky ride for the economy," said Rabobank currency strategist Jane Foley.
Sterling also fell 0.4 percent to 85.12 pence against a euro that was also weakened by the strong U.S. inflation data. Consumer prices increased more than expected in August, the U.S. Labor Department said, giving some investors confidence in the view that the U.S. Federal Reserve will raise interest rates by the end of the year.
Not everyone shared that view, however.
"It appears unlikely that the Federal Reserve or ongoing market expectations about its interest rate intentions will be sustainably altered by August's U.S. inflation data," said City Index analyst Ken Odeluga.
"Given that we do not believe the magnitude of August’s inflation rise will convince the Fed (to hike rates), we also think the immediate upturn in market CPI expectations, the dollar, and the slide in stocks—will fade in the short term."
(Editing by Jeremy Gaunt)