Sterling rolled back against the US dollar on Tuesday as currency traders mulled the prospect of interest rates being kept on hold next month.
The pound was down 0.5 per cent versus the greenback at $1.31 despite Bank of England Governor Mark Carney telling MPs that a rate hike may be needed over the coming months to tackle surging inflation.
The UK currency was 0.1 per cent lower against the euro at €1.12 when the London market closed, with the FTSE 100 Index drifting 10.80 points lower at 7,516.17.
It came despite sterling showing little movement earlier in the session when the latest slew of economic data showed inflation in September had surged to its highest level for more than five years.
Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation reached 3 per cent last month, rising in line with expectations from 2.9 per cent in August.
The step-up in CPI was driven by higher food and transport costs, pushing the headline rate to levels not seen since April 2012.
Neil Wilson, senior market analyst at ETX Capital, said: "Sterling lost ground as the market decided the Bank of England is no longer definitely minded to hike rates in November.
"Mark Carney suggested tightening may be warranted in the coming months and failed to give an explicit signal on November, while Dave Ramsden sounded overtly dovish.
"Some sterling bulls threw in the towel but this looks a trifle cautious - while not nailed on the hawks should edge it next month."
On European markets, the Cac 40 in France was marginally lower and Germany's Dax dropped by 0.1 per cent.
In oil, Brent crude sunk by 0.9 per cent to $57.37 a barrel, retreating from Monday's gains when the conflict between the Iraqi government and the Kurds around the city of Kirkuk threatened to disrupt supply.
Focusing on UK stocks, Merlin Entertainments saw its share price plunge 15 per cent after the Alton Towers and London Eye owner suffered during peak trading.
The firm's latest trading figures confirmed a "difficult" summer for its London attractions and UK theme parks after a spate of terrorist attacks, which saw group like-for-like revenue growth almost grind to a halt, edging up 0.3 per cent in the 40 weeks to October 7.
Poor late summer weather across the UK and Northern Europe and extreme weather in Italy and Florida were also to blame, according to Merlin.
Shares were down 71.7p to 378p.
On London's junior market, shares in online retailer ASOS rose by nearly 1 per cent following a surge in full-year profits.
The AIM-listed firm saw shares climb 50p to 5,750p after it clocked a 33 per cent rise in revenues to £1.9 billion in the year to August 31, with pre-tax profits growing 145 per cent to £80 million.
On a constant currency basis, sales rose 27 per cent and, stripping out exceptional items, pre-tax profits rose 26 per cent.
The biggest risers on the FTSE 100 Index were Pearson up 45.5p to 667p, Convatec up 8p to 213p, International Consolidated Airlines Group up 16.5p to 635.5p, easyJet up 28p to 1,316p.
The biggest fallers were Merlin Entertainments down 71.7p to 378p, Mediclinic International down 29.5p to 645.5p, Standard Life Aberdeen down 17.3p to 429p, 3I Group down 28p to 940p.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here