The greenback was mixed in Tuesday trading, higher against the yen around the 108-level but giving back some of its gains versus the euro to relinquish the 1.55-level. The economic reports released included May PPI, housing starts, building permits, capacity utilization, and industrial output. May housing starts fell by more than expected to 969k units, versus 1.032 million units a month earlier. Meanwhile, producer prices rose by 1.4% versus 0.2% a month earlier and up to 7.2% compared with 6.5% in the previous year. Industrial output missed calls for an improvement to 0.1% falling by 0.2%, while capacity utilization fell to 79.4% from 79.7% a month earlier.

GBP Lower on Inflation

The sterling fell sharply overnight following the release of May CPI, which prompted a sell-off in the currency to 1.9467 against the dollar and 0.7954 versus the euro. The May CPI figures were slightly higher than forecast at 3.3%, compared with estimates for an increase to 3.2% from 3.0 in the previous year. The monthly figure was also higher than expected at 0.6% versus calls for a larger decline to 0.5% from 0.8% in April. The RPI readings also ticked higher, with the headline May RPI increasing to 4.3% versus 4.2% a year earlier, while easing off to 0.5% from 0.9% a month earlier. The May RPI-x fell to 0.7% from 0.9% in the previous month and climbing to 4.4% compared with 4.0% a year earlier.

With UK inflation above 3.0%, BoE Governor King provided a letter to UK Chancellor Exchequer Darling explaining why inflation exceeded the Bank's 2% target by more than 1%. In the letter, King said that inflation is likely to remain markedly above the target until well into 2009 but assured the Committee will maintain price stability by ensuring that the rise in inflation is temporary. Nonetheless, it is unlikely the Bank of England will tighten monetary policy given the current outlook and the persistent weakness plaguing the economy.

Cable recouped some of its earlier losses, climbing back above the 1.95-level to 1.9570. Resistance is seen at 1.96, followed by 1.9630 and 1.9670. Subsequent ceilings are eyed at 1.97, backed by 1.9740 and 1.98. On the downside, support starts at 1.9525, followed by 1.95 and 1.9470. Additional floors will emerge at 1.9440, backed by 1.94 and 1.9350.