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Cable plunges below 1.60 as UK inflation hits lowest level in 5 years

H.S. Borji
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The GBPUSD declined 150 pips on Tuesday as UK inflation fell to its lowest level in five years, likely pushing back expectations about when the Bank of England will begin raising interest rates.

Cable plunged to an intraday low of 1.5905. It would subsequently consolidate at 1.5923, declining 153 pips, or 0.95 percent. The pair has declined 1.5 percent over the last five days and 7.2 percent since reaching a multi-year high of 1.7161 on July 3.

The pound declined against the euro, as the EURGBP reached an intraday high of 0.7957. The pair would subsequently consolidate at 0.7948, advancing 0.26 percent.

In economic news, the UK released its latest batch of consumer inflation data. UK inflation fell to its lowest level in five years, giving the Bank of England more scope to maintain record low interest rates.

UK consumer prices were flat in September, following a gain of 0.4 percent the previous month, the Office for National Statistics reported today. Economists forecast a monthly increase of 0.2 percent.

Year-on-year, consumer prices advanced only 1.2 percent, down from 1.5 percent the month before. Economists forecast an annualized gain of 1.4 percent.

So-called core consumer prices, which strip away volatile goods such as food and energy, rose at an annual rate of 1.5 percent in September.

The retail price index, another measure of inflation, increased 0.2 percent in September. Compared to September 2013, the retail price index was down 0.1 percentage point to 2.3 percent.

The news snuffed the light on a rate hike in the next few months, according to analysts, who now say the Bank of England will maintain record low interest rates well into next year. The BOE, which targets the consumer price index at 2 percent, previously indicated it was hesitant about raising interest rates because of persistent slack in the labour market. With inflation continuing to drop, central bankers will be even more cautious in adjusting monetary policy.

The central bank has been split on how to proceed with monetary policy the last two months. The Monetary Policy Committee voted 7-2 in favour of maintaining interest rates at 0.5 percent at the September meetings. MPC members Martin Weale and Ian McCafferty voted once again to raise interest rates by 25 basis points, maintaining that broad improvements in the labour market would eventually lead to higher earnings growth in the near future.

Weak earnings growth has been a central issue for the BOE, which earlier this year downgraded its outlook on earnings. The ONS will report on average earnings on Wednesday alongside the official employment figures.

Average earnings are forecast to increase at an annual rate of 0.8 percent in the three months through August, following a 0.7 percent increase the month before. Including bonuses, average earnings are forecast to increase 0.7 percent over the same period, up from 0.6 percent in the three months through July.

The ILO unemployment rate is forecast to fall further in the three months through August, as recipients of unemployment benefits are expected to decline 35,000 in September.

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