The British pound fell on Wednesday following the release of data indicating that inflation in the UK slowed more than anticipated in September. This easing of inflation raises the likelihood of

further interest rate cuts by the Bank of England (BoE) later this year.

The pound weakened by 0.5% against the U.S. dollar, falling to $1.30075, after initially trading flat before the data release. It also slipped against the euro, which gained 0.4% to 83.63 pence.

UK inflation dropped to 1.7% year-on-year in September, down from 2.2% in August, marking the lowest level since April 2021. This figure was below the 1.9% forecast in a Reuters poll.

Month-on-month, the headline Consumer Price Index (CPI) remained unchanged, while services inflation, a key focus for policymakers, eased to 4.9% year-on-year.

"The decline in inflation reported today suggests an interest rate cut in November is likely. The key question now is whether borrowers can expect an additional cut before the end of the year," said Ed Monk, associate director at Fidelity International.

In August, the BoE reduced borrowing costs from a 16-year high of 5.25% to 5.0%, but it has signaled a cautious approach to further cuts due to the gradual slowdown in wage growth, a major factor driving inflation in the services sector.

Earlier this year, expectations that the BoE would cut rates more slowly than the U.S. Federal Reserve and the European Central Bank (ECB) had supported the pound. However, the gap in rate expectations has since narrowed.

The ECB is set to meet on Thursday and is widely expected to cut rates by 25 basis points. Investors will closely watch for any signals from ECB President Christine Lagarde regarding policymakers' long-term expectations, which could influence the euro’s trajectory, particularly in relation to the pound.