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Cable pulls back from 1.70, risks further losses on weak UK CPI

H.S. Borji
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The British pound pulled back from a five-year high against the US dollar, as weak consumer price growth raised concern about tame inflation in the UK.

The GBPUSD declined 0.17 percent to 1.6953, rebounding from an intraday low of 1.6941. The pair is testing initial support at 1.6957. Below that level support is likely found at 1.6931. On the upside, initial resistance is likely found at 1.7010.

The pair exceeded 1.70 Monday to set a fresh five-year high on the heels of strong UK labour market data and hawkish sentiment from Bank of England Governor Mark Carney. On Thursday Carney said the central bank could begin raising interest rates sooner than expected, a sign policymakers are growing more confident in the UK economy.

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said in a speech on Thursday. “It could happen sooner than markets currently expects.”

Carney said any change in policy would be “gradual and limited” to account for downside risks to recovery.

The Bank of England has kept interest rates at a record low of 0.5 percent for more than five years. The minutes of the June 5 policy meeting will be released Wednesday.

In economic data, UK inflation fell to its lowest level in four-and–a-half years, clouding the outlook on BOE policy. UK consumer prices advanced 1.5 percent annually in May, the Office for National Statistics reported today. Economists forecast consumer prices to rise 1.7 percent annually.

The so-called core consumer price index, which excludes volatile elements such as food and energy, advanced 1.6 percent annually following a 2 percent hike in the previous month. Economists forecast core consumer prices to rise 1.7 percent.

Declining inflation has allowed the BOE to keep interest rates at record lows. The latest decline in consumer prices could place further pressure on sterling, triggering a larger pullback should BOE officials express concern about price growth.

The ONS will report on retail sales Thursday and public sector net borrowing Friday.

In US data, consumer inflation in May registered its biggest increase in more than a year, as food prices posted their biggest rise since August 2011. Consumer price inflation rose 2.1 percent annually in May, following a 2 percent advance the prior month, the Commerce Department reported today.

Core prices advanced 2 percent annually, following a 1.8 percent increase in April.

A separate release from the Commerce Department showed a further slowdown in the housing market. US building permits declined 6.4 percent in May to a seasonally adjusted annual pace of 991,000, while groundbreaking declined 6.5 percent to a 1.001 million pace.

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