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Sterling hits five-week low against resurgent euro

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[LONDON] Sterling sank in morning trade on Tuesday as speculative investors slashed bets against the euro and traders sold hard into a bounce above US$1.2950 that followed strong inflation numbers.

The pound hit an almost one-week high against the US dollar immediately after the data showed inflation rose more than expected, to 2.7 per cent, in April, adding to headaches for Bank of England policymakers who have so far looked through this year's pick-up in price pressures bounce and kept interest rates steady.

Traders said its more than half-US cent fall thereafter reflected a conviction in the market that sterling will struggle to top US$1.30 this year given the scale of concern over Brexit negotiations with the European Union.

Investors have also tended to read the rise in inflation as purely the consequence of the pound's falls since last June's referendum vote to leave the bloc, and more likely to weigh on consumer sentiment than spur a rise in official BoE rates.

Market voices on:

"It did just seem like a good moment to fade any sterling rally, ahead of the employment and retail sales numbers later in the week," said Stephen Gallo, an FX strategist with Bank of Montreal in London. "(This morning's moves) have shown there is a little more pain left in the euro short trade."

By 0934 GMT, sterling was 0.2 per cent lower on the day at US$1.2873. It sank 0.75 per cent to 85.78 pence per euro.

While inflation has been strong, there have been intermittent signs in activity and other data that UK consumers, the drivers of a relatively robust economic performance in the past year, are beginning to feel more pain.

One assumption in last week's BoE's inflation report that investors questioned was that wage growth would take off more convincingly over the next two years - as it has consistently failed to do since 2008.

Wages and other labour data are due on Wednesday. Retail sales numbers for April are on Thursday.

"The MPC's core mandate is focused on inflation, but the drop in real earnings and squeeze on UK households will make the committee reluctant to raise rates, despite the upward trajectory of inflation data," said Richard Meo, Managing Director at broker Foenix Partners.