Sterling is heading toward a fall against both the dollar and euro following early indications that UK growth is weakening.

Against the dollar the pound was trading at 1.86 on the foreign exchange first thing this morning, down from 1.87 at the same point last week, and at 67.55 against the euro. 

"There's risks on the downside for sterling,'' said Ian Gunner, head of foreign exchange at Mellon Financial in London. "The market's been hawkish on interest rates and it overdid that," he added.

Sterling fell to its lowest level since July this week after data showed the lowest level of growth in one and a half years.

The decline in the pound may be limited on expectations that the Bank of England will continue raising rates into early 2007.

The bank's governor warned that inflation is still a source of concern for policy makers. The bank is widely expected to add a quarter point to interest rates next month.