The pound dropped to its lowest in two months on Thursday as bets on U.S. rate hikes boosted the dollar and the Bank of England struck a measured tone on inflation as it held borrowing costs steady.
Sterling fell 0.6% to $1.322, its lowest since early April, as the dollar surged.
The pound was already trading lower but slipped further after the Bank of England held interest rates at 3.75%, judging it would be premature to hike rates given the uncertainty around inflation.
The BoE's approach contrasts with the European Central Bank and Bank of Japan, which both raised interest rates in recent days.
On Wednesday, traders moved to price in rate increases from the Federal Reserve this year after almost half of policymakers signalled they expected a hike by December.
"For now, the Bank (of England) is playing for time rather than going on the attack," said George Brown, senior economist at Schroders.
"We think the bar for hikes remains high. A softer labour market and weak growth should help limit second-round effects, and progress on reopening the Strait of Hormuz should also reduce some of the more extreme upside risks to energy prices."
Oil prices fell again on Thursday in the wake of the U.S.-Iran deal, but the focus in markets was on the potential for Fed hikes.
Bets on rate increases boosted the U.S. dollar index, which tracks the currency against its major peers, to its highest in more than a year on Thursday.
UK bond yields fell slightly after the BoE decision but remained higher on the day along with global peers, with the rate-sensitive 2-year Gilt yield last up 6 basis points (bps) at 4.21%.
British stocks slipped a touch further, with the FTSE 100 index last down 1.1%.
The euro was up 0.2% against the pound.
