RTTNews - Tuesday during early European deals, the pound jumped to a fresh multi-month high against the euro after a report showed that U.K.'s consumer price inflation slowed less than expected in May as higher taxes and the weakness of the pound sustained price pressures in the economy.

UK's annual inflation fell to 2.2 percent in May from 2.3 percent in April, the Office for National Statistics said. Although this was the lowest year-on-year rate since January 2008, it was above forecasts for a bigger fall to 2.0 percent.

On a monthly basis, consumer prices were up 0.6%, larger than the expected 0.3% increase.

The report also showed that the retail price index in May stood at 212.8, up from.211.5 in April. Retail prices were down 1.1% from the previous year, following a 1.2% decline in April. From April, retail prices rose 0.6%. Economists were looking for an 1.5% annual fall and a monthly growth of 0.2%.

Inflation has been sticky because of the U.K. currency's drop in the past year, Bank of England markets director Paul Fisher said last week.

Policy makers still predict it will slow further and are spending 125 billion pounds ($204 billion) of newly printed money in U.K. debt markets to prevent deflation from taking hold.

Inflation has been slow to fall despite much lower energy and commodity costs compared to last year and a recession, perhaps due to the weakness of sterling.

But policymakers still expect inflation to fall sharply over the coming months and, as such, the figures are unlikely to alter expectations that monetary policy will remain loose for a considerable period of time.

The Bank has cut interest rates to a record low of 0.5 percent and resorted to a 125 billion pound asset-buying spree with newly created cash to kick start Britain's recession-hit economy.

The government has set a 150 billion pound ceiling for the quantitative easing programme and many analysts expect the Bank to use all of that.

The pound jumped to a fresh 6 1/2 -month high of 0.8441 against the euro during early European deals on Tuesday. The next upside target level for the pound is seen at 0.824. At yesterday's close, the euro-pound pair was quoted at 0.8458.

The euro plunged against the pound today despite a report showed that Germany's economic sentiment index improved significantly in June, rising for the eighth month in a row.

The ZEW Indicator of Economic Sentiment for Germany rose to 44.8 points in June from 31.1 points in May. The latest reading came much better than the 34 points expected by economists. Further, the June reading is above the indicator's historical average of 26.3 points.

The pound tumbled 25% against the euro in 2008 and fell to a record low of 0.9806 on December 30. But the pound is showing strength since the beginning of this year and it has appreciated 14% thus far as prospects for the U.K. economy have improved.

Reports showed last week that U.K.'s manufacturing output rose for the second straight month in April and the nation's house price balance in May reached its highest level since November 2007.

The pound that tumbled to a 1-week low of 1.6212 against the dollar in early Asian deals today bounced back during early European trading. At 5:00 am ET, the pound-dollar pair reached a 4-day high of 1.6483, compared to yesterday's New York session close of 1.6316. If the U.K. currency advances further, it may likely target the 1.653 level.

The pound lost 1% against the dollar yesterday as the latter was boosted by supportive comments from Russian Finance Minister Alexei Kudrin at the weekend's G8 summit.

Kudrin said on the sidelines of the meeting that the dollar's role as the main reserve currency was unlikely to change in the near future. He added that fundamentals of the Dollar are still in good shape and said it was too early to speak of an alternative reserve currency.

Amid a plunge in Asian stocks today, the pound slumped to an 8-day low of 156.52 against the yen at 1:55 am ET. But the U.K. currency recouped its losses in early European deals as a rise in regional stocks supported the currency.

Britain's leading share index gained 0.2 percent in early deals today, as energy prices stabilised, boosting demand for oil and gas producers, while defensive drugmakers also gained ground.

At 6:07 am ET, the FTSE 100 .FTSE was up 16.52 points at 4,342.48, after two days of losses pushed it touch a six-week closing low on Monday.

The pound-yen pair is currently trading at 159.58 with 162.1 seen as the near term resistance level. The pair was worth 159.64 at Monday's close.

The pound reversed direction against the Swiss franc after touching a low of 1.7725 at 11:55 pm ET Monday. Presently, the pound-franc pair is worth 1.7859, up from yesterday's close of 1.7822. The next likely target is seen at 1.789 for the U.K. currency.

Traders are now likely to focus on the New York session, in which a report on housing starts, is slated to be released at 8:30 am ET. Economists estimate housing starts of 485,000 for May.

At the same time, the U.S. Labor Department is scheduled to release a report on the producer price index . Economists expect the headline index to show 0.6% growth and the core index to show 0.1% growth.

The industrial production report of the Federal Reserve is due out at 9:15 am ET. Economists estimate that industrial production declined 1% in May, while capacity utilization is expected to come in at 68.4%.

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