Sterling fell to its lowest in weeks against the dollar and the euro on Tuesday on expectations that Bank of England chief Mark Carney will reaffirm his dovish policy credentials in a keynote speech.
Many market players anticipate that, in a speech in Nottingham on Wednesday, Carney will look to rein in the sharp rise in UK money market rates following a run of strong UK economic data and reiterate a pledge to keep interest rates low.
British gilt yields fell to 2.62 percent from Friday's high of 2.76 percent, also buoyed by safe-haven flows due to escalating tensions over Syria.
Sterling was down 0.4 percent at $1.5509, close to the day's trough of $1.5506 which was its lowest since mid-August and dipping below initial support at $1.5514, the pound's 200-day moving average.
The euro was up 0.1 percent at 85.93 pence, close to the intra-day peak of 86.17 pence which was its highest since August 9. Chartists cited initial resistance at the April 17 high of 86.37 pence.
The single currency firmed against the pound after data showed that German business morale rose to its highest in over a year in August.
"There is some weakness in sterling ahead of Carney's speech," said Angus Campbell, head of market analysis at FxPro.
"Because sterling had bounced quite strongly since the beginning of August, traders are perhaps returning to reality and thinking Carney might talk down rate hike expectations and reiterate why he is so dovish with his forward guidance."
Carney pledged early in August to keep rates low until unemployment falls to 7 percent, which the bank sees as unlikely for another three years. But improving economic data had fanned expectations that rates will rise sooner than that.
BoE Deputy Governor Charlie Bean said on Monday the central bank had sent a "clear signal" that interest rates are not likely to rise imminently.
Confederation of British Industry survey data released overnight showed business volumes in UK services firms surged to their highest since 2007 in the past three months, with further growth expected later this year.
Sterling overnight interbank average rates (SONIA) were pricing in a first rate rise by around mid-2015, essentially unchanged from last Friday. UK markets were closed on Monday.
Morgan Stanley analysts said the "continued dovish message coming from the BoE" would weigh on sterling. "We maintain our bearish GBP/USD position and have lowered the stop to the $1.5640 entry level. We expect an initial decline through $1.5540 to $1.5265."
