Investing.com - The pound fell to four month lows on Tuesday after weak UK factory data further cut chances for a near term rate hike by the Bank of England, while the broadly stronger dollar rose to multi-month highs against a currency basket.

GBP/USD was down 0.68% to 1.3669 by 05:08 AM ET (09:08 AM GMT) from around 1.3727 earlier. It was the lowest level since January 12.

The pound extended early losses after data showing that activity in the UK manufacturing sector grew at the slowest pace in seventeen months in April.

The report saw investors slash expectations for a rate hike from the BoE at its upcoming meeting next week after overall economic growth slowed to near stagnation in the first quarter.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.41% to 92.02, the strongest level since January 11.

The index rose 2% in April after the yield on 10-year U.S. Treasury notes rose above the psychologically important 3% level for the first time in four years.

The dollar was boosted on Monday after the Commerce Department said annual inflation hit the Federal Reserve’s 2% target for the first time in over a year in March.

Rising inflation would be a catalyst to push the Fed toward raising interest rates at a faster pace than currently expected. Fed officials projected three increases in 2018 at their meetings December and March.

The Fed is due to conclude its two-day meeting on Wednesday and is not expected to take any action on interest rates. The majority of economists believe the next move higher will come its meeting in June.

Markets are also looking ahead to Friday’s U.S. employment report for April, which could provide further signs of strength in the world's largest economy.

The euro fell to four month lows against the dollar, with EUR/USD down 0.31% to 1.2031.

The single currency was pressured lower after data on Monday showing that retail sales in Germany, the euro area’s largest economy, declined for a fourth consecutive month in March.

It was the latest indication that growth in the euro zone has moderated since the start of the year, dampening expectations that the European Central Bank will soon start scaling back its stimulus program.

The euro rose to the day’s highs against sterling, with EUR/GBP climbing 0.3% to 0.8798, up from 0.8769 earlier.

The dollar rose to fresh two-and-a-half month high against the yen, with USD/JPY up 0.3% to 109.63.

Meanwhile, the Australian dollar plumbed fresh four-and-a-half month lows, with AUD/USD down 0.31% to 0.7507.

The Aussie showed little reaction overnight after the Reserve Bank of Australia left interest rates on hold in a widely anticipated decision and said that its expected inflation to remain muted.

The New Zealand dollar was last at 0.7013, its lowest level since December 26.