LONDON, Aug 19 (Reuters) - Sterling hit a four-month low against the dollar and a near two-month trough versus the euro on Tuesday after weaker-than-expected inflation data eased pressure on the Bank of England to raise interest rates.
Consumer prices rose 1.6 percent on the year in July, the Office for National Statistics said. That is well below the Bank of England's 2 percent inflation target.
A Reuters poll had forecast inflation would fall to 1.8 percent, from 1.9 percent in June. Month-on-month, the consumer price index fell 0.3 percent.
The pound dropped to $1.6616, its weakest since April 8, from around $1.6690 before the data. It has now shed 3.4 percent since hitting a six-year high of $1.7192 on July 15, as investors unwound rate hike expectations.
Sterling was among the worst-performing actively traded currencies and chartists said if it closes below its 200-day moving average of $1.6675 on Tuesday, more losses may be in store.
It fell further in European afternoon trade after better-than-expected U.S. housing data lifted the dollar.
The euro rose 0.35 percent to 80.275 pence from around 79.90 pence before the inflation numbers were released. The single currency struck a two-month high of 80.37 pence last week after a Quarterly Inflation Report from the Bank of England was perceived as dovish.
After that report, Governor Mark Carney said rates were unlikely to rise until wages picked up, although he moderated those comments in an interview to a newspaper at the weekend.
"With dovish comments from BoE Governor Mark Carney last week, this fall in inflation will provide the monetary policy committee with even more reason to hold out for first-quarter 2015 before tightening monetary policy," said Jake Trask, corporate dealer at UKForex.
Sterling had been the best performer by far among major currencies in the year to the start of July, pushed up by expectations the BoE might start raising interest rates to cool the economy as early as November.
But while economic growth is robust, rate hike expectations have now been pushed back to early next year because wages are not yet rising in real terms.
With signs that the housing sector is cooling and uncertainty caused by an impending Scottish referendum on independence, some analysts said sterling's gains would be muted.
"Should tomorrow's BoE meeting minutes paint a similar picture to today's inflation news, losses for the pound may continue in August," said Nawaz Ali, analyst at Western Union.
Minutes from the latest monetary policy meeting are due on Wednesday and there is speculation that the meeting might have seen the first dissenting vote in favour of a rate hike.
(Editing by Nigel Stephenson and Susan Fenton)