The pound headed for its biggest two-day drop since late July on Friday, after a surge in UK public borrowing and a Bank of England rate decision that highlighted the difficulties policymakers face in balancing growth and inflation.
Official data on Friday showed public sector borrowing between April and August totalled 83.8 billion pounds ($113.39 billion), 11.4 billion pounds more than forecast by the Office for Budget Responsibility earlier this year.
The surge compounds the problem finance minister Rachel Reeves faces with her November budget, in which she had already been expected to announce new tax rises to stay on track to meet her fiscal rules and avoid unsettling financial markets.
"The pound has sunk on this data, and is testing support at $1.35, it is the second-worst performing currency in the G10 FX space today," XTB research director Kathleen Brooks said.
Sterling fell as much as 0.4% in early trading before paring some of that decline to trade down 0.3% at $1.351. It has lost almost 0.9% in the last two days alone, the largest such decline since July 31.
Meanwhile, the BoE left interest rates unchanged on Thursday, as expected, and opted to reduce the pace of its government bond sales to minimise the impact on the more volatile longer-dated section of the market.
With inflation running at nearly double the central bank's 2% target, the BoE has only limited scope to lower rates much more to help shore up the economy, where evidence is mounting of weakness in the labour market.
UK bond yields rose on Friday, with long-dated 30-year gilts up 4.3 basis points at 5.547%.
Data on Friday showed retail sales rose by more than expected in August, thanks to sunny weather, although sales growth in July was revised down.
A number of major retailers, including Primark owner Associated British Foods and budget supermarket Aldi UK have signalled concern about the outlook for consumer spending given upcoming tax rises and a deteriorating jobs market.
"This is yet another disappointing piece of economic news which will add to Chancellor Rachel Reeves's woes. But as we saw yesterday, the Bank of England dare not cut rates given that inflation is nearly double the official target of 2%, and likely to rise further," Trade Nation senior market analyst David Morrison said.
The pound also fell sharply against the yen, which staged a broad rally after the Bank of Japan left rates unchanged, but two surprise dissenters voted for a hike. Japan's central bank also decided to start selling its holdings of riskier assets, which suggests it may phase out its monetary stimulus programme sooner than expected. Sterling was down 0.45% at 199.73 yen.
(Reporting by Amanda Cooper; Editing by Philippa Fletcher)
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