The pound fell against other major currencies after weaker-than-expected inflation data was seen as reducing the prospect of an early rise in UK interest rates.
CPI inflation remained unchanged at 2.6% last month, whereas analysts had expected the rate to climb to 2.7%.
The data led to speculation that inflation could have peaked already.
The pound fell below the $1.29 mark against the dollar, dropping more than a cent to $1.2860.
Against the euro, sterling fell 0.4% to 1.0959 euros.
"The expected pickup didn't happen. Inflation remains cooler and the pound dipped as investors had expected a rebound in July following the surprise drop in June," said Neil Wilson at ETX Capital.
"It certainly cements the belief that a rate hike this year now looks highly unlikely. The market was positioned for a bit more inflation than we're getting.
"CPI is still expected to peak at 3% later this year before easing back, yet there are signs that inflation may have already peaked."
As the pound fell, shares rose, with the FTSE 100 index up 29.96 points to 7,383.85 at the close. A fall in the pound often benefits the FTSE 100 as it means overseas earnings for companies listed on the index are worth more when they are converted back into sterling.
Among the fallers, shares in Next shed 2.8% after Berenberg cut its rating on the High Street fashion chain to "sell" from "hold".