GBP/USD plunges to two-month lows as UK inflation data disappoints

British pound plunged to its lowest point in two months against the US dollar on Tuesday, as a report showed that annual consumer inflation in the United Kingdom decelerated more than projected in October, marking the lowest level in over a year.

GBP/USD fell steeply to a session low at 1.5854 at 9:32 GMT, also the pairs lowest point since September 13th, after which consolidation followed at 1.5867, down 0.76% for the day. Support was likely to be received at September 13th low, 1.5776, while resistance was to be met at psychological level of 1.5900.

According to data by the Office for National Statistics (ONS), the annual index of consumer prices (CPI) decelerated to 2.2% in October, or a level unseen since September 2012, from 2.7% in September. Analysts had projected that the index will decrease at a lesser pace to reach 2.5% in October. On a monthly basis, the CPI ticked up 0.1% in October, also slowing down in comparison with a pace of 0.4% in September. This report boosted the view that Bank of England may probably continue keeping borrowing costs at current record low levels, until the rate of unemployment in the country falls below 7.0%. The rate currently stays at 7.7%, according to most recent data. Major factors behind this inflationary slowdown have been the lower costs of gasoline and other fuels, as well as the lower costs in supermarkets due to promotions of different sort.

The annual core consumer price index, which excludes volatile components such as costs of food, energy, tobacco and alcohol, slowed down to 1.7% in October, or the lowest level since September 2009, from 2.2% a month ago, while experts had anticipated a drop to 2.0% in October.

The retail price index (RPI) in the country also decelerated its pace, rising 2.6% in October annually, below the projected rate of 2.9%, after in September the index climbed 3.2%. In monthly terms, the RPI demonstrated a flat performance in October, following a 0.4% gain in September.

In addition, nations input producer price index (PPI) fell 0.6% in October compared to September, after a month ago it dropped another 1.2%. The annual PPI decreased 0.3% in October, after a 1.1% increase during the preceding month.

Overall inflationary slowdown in the United Kingdom came, to a certain extent, in consonance with the registered harmonized CPI slowdown in the Euro zone in October, with the annual index reaching barely 0.7%, as reported earlier. According to ONS, however, the above mentioned weaker data points were mostly due to lower domestic consumer prices.

Lastly, the index of house prices advanced 3.8% in September 2013 compared to September 2012, retaining the rate of increase shown in August, while preliminary estimates pointed a 4.1% gain in September.

“The market has got a little bit ahead of itself on sterling,” John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen, said before today’s inflation data, cited by Bloomberg News. “There’s a risk that people have become too hawkish ahead of the Inflation Report.”

The yield on UK benchmark 10-year gilts dipped two basis points, or 0.02 percentage point, to reach 2.78% today, after touching 2.83%, or the highest level since October 16th.

Meanwhile, since Thursday last week the US dollar has been continuously supported by the strong economic reports, that came out from the United States. On Friday the Bureau of Labor Statistics said that employers in the country unexpectedly added more job positions than projected in October. Non-farm payrolls increased by 204 000 in October, well above the expected 120 000 new jobs and above the revised up number of 163 000 jobs, added in the previous month.

On Thursday another report revealed that US economy expanded at a steeper than expected rate during the third quarter of the year. The Gross Domestic Product rose at an annualized rate of 2.8% in Q3, following the 2.5% expansion in Q2, which marked the best quarterly performance this year.

Markets awaited Janet Yellen’s confirmation hearing on November 14th for the position of Chairwoman of the Federal Reserve Bank, with investors assessing whether the world’s largest economy is sufficiently resilient, so that the central bank may begin paring back its stimulus.

Elsewhere, the sterling lost ground also against the euro, with EUR/GBP cross advancing 0.58% on a daily basis to trade at 0.8436 at 10:20 GMT. GBP/JPY pair was falling 0.18% to trade at 158.28 at 10:21 GMT. British pound has appreciated 3.3% during the past three months, which marks the best performance among 10 developed-nation currencies, tracked by Bloomberg Correlation-Weighted Indexes. The euro has risen 0.9%, while the US dollar has climbed 0.4% during the same period.

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