The pound hit its lowest level against the US dollar (GBPUSD=X) since September 2020 as weak economic data, a fall in UK retail sales, and a cost of living crisis took its toll.
Sterling dropped by almost a cent to $1.2740 on Monday, down 0.74% against the greenback, adding to its fall on Friday, while it also edged lower against the euro (GBPEUR=X).
The prospect of aggressive rate hikes by the US Federal Reserve also helped to drive the dollar higher on the day.
Money markets now have scaled back their bets on future monetary policy tightening from the Bank of England (BoE) after hints it may not be as aggressive as other central banks in its fight against inflation.
Last week, BoE governor Andrew Bailey said UK interest rates may be increased less aggressively amid fears the UK may fall into recession if they are hiked too far.
Speaking at the sidelines of the World Bank and International Monetary Fund (IMF) spring meetings in Washington he said the Bank was walking a fine line between combating inflation and avoiding recession.
Bailey also raised concerns about the risks of persistent inflationary pressure from a strong labour market, with rising wages causing higher inflation for longer.
"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," he said at the Peterson Institute for International Economics.
Threadneedle Street has already raised interest rates three times since December, more than any other minor central bank. Traders believe the Bank is looking to move rates from the current 0.75% level to 2.5% by this time next year.
John Hardy, Saxo Bank’s head of FX strategy, said: "The market has likely over-estimated the BoE’s potential to hike rates this year".
Data from Saxo Bank also revealed the trend in EUR/GBP has now shifted to neutral, having been negative for a long period of time.
This is a contrast to the likes of the Fed, which is now seen raising borrowing costs by 50 bps at its meetings in May, June and possibly July.
Hawkish repricing of Fed policy has pushed the US 2-year yield up 128 bps to 2.72% since March. The 2-year gilt has also drifted upwards, climbing 66 bps to 1.70% over the same period.