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Pound Drops As BoE Rate Cut Odds Grow After Weak U.K. Inflation Data

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The pound depreciated against its key counterparts during European deals on Wednesday, after Bank of England policymaker Michael Saunders joined his peers in supporting a potential interest rate reduction and as U.K. inflation eased to its lowest since November 2016 ahead of the interest rate-setting meeting this month.

Data from the Office for National Statistics showed that UK consumer price inflation eased to a three-year low in December.

Inflation slowed to 1.3 percent in December from 1.5 percent in November. The rate was forecast to remain steady at 1.5 percent.

Consumer prices remained flat on a monthly basis after rising 0.2 percent a month ago. Prices were expected to rise again by 0.2 percent.

On a monthly basis, input price inflation fell to 0.1 percent from 0.5 percent in November.

The weak inflation reading increased speculation that the BoE is likely to cut interest rate when it meets later this month.

In a speech in Northern Ireland, Saunders said the UK economy has "remained sluggish" and the most likely outcome is a "further period of subdued growth."

"It is possible that we cut rates now and then find that the economy rebounds and renewed tightening is appropriate, say a year from now. I don't think such a quick reversal is likely, but it is not inconceivable."

With limited monetary policy space, risk management considerations favor a relatively prompt and aggressive response to downside risks at present, Saunders added.

In other economic releases, data from the ONS showed that output price inflation accelerated to 0.9 percent in December from 0.5 percent in November.

Month-on-month, output prices remained flat, following three straight months of negative change.

Simultaneously, input prices decreased for the fifth consecutive month. Input prices fell 0.1 percent annually, slower than the 1.9 percent decline in November.

The currency moved up against its major opponents in the previous session.

The pound was 0.4 percent lower at 1.2985 against the greenback, after approaching a 2-day peak of 1.3042 at 1:15 am ET. The pair had closed yesterday's deals at 1.3017. Should the pound falls further, 1.27 is likely seen as its next possible support level.

Having strengthened to 143.39 against the yen at 1:15 am ET, the pound turned weaker, falling 0.5 percent to 142.66. The pair was valued at 143.18 when it ended trading on Tuesday. Further decline in the pound may locate support around the 140.00 area.

The Bank of Japan downgraded the economic view of three out of nine regions.

In its quarterly Regional Economic Report, the bank said all nine regions reported that their economy had been either expanding or recovering.

The pound recorded a 0.4 percent drop against the Swiss franc, falling to 1.2543, its weakest since October 14. The pound had finished Tuesday's trading at 1.2590 against the Swiss franc. The pound is likely to challenge support around the 1.23 region, if it drops again.

The pound was down by 0.4 percent at 0.8571 against the euro, following a 2-day high of 0.8537 seen at 1:15 am ET. The euro-pound pair was quoted at 0.8543 at Tuesday's close. Next key support for the pound is possibly seen around the 0.88 level.

Data from Eurostat showed that Eurozone industrial production grew for the first time in three months in November.

Industrial production grew 0.2 percent on month, in contrast to a 0.9 percent fall in October. Nonetheless, this was slower than the 0.3 percent rise economists had forecast.

Looking ahead, Canada existing home sales and U.S. producer price inflation for December, the New York Fed's empire manufacturing survey for January and Fed Beige book report will be featured in the New York session.

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