- The pound fell to session lows against the dollar and the euro on Tuesday after data showed that the annual rate of inflation in the U.K. fell to the lowest level in four-and-a-half years in May.

GBP/USD was down 0.22% to 1.6945, from 1.6981 ahead of the data. The pair rose to a five-year high of 1.7011 on Monday.

Cable was likely to find support at 1.6900 and resistance at 1.6990.

The drop in the pound came after the Office for National Statistics said the annual rate of inflation came in at 1.5% last month, down from 1.8% in April and the lowest reading since October 2009.

Economists had expected the annual inflation rate to slow to 1.7%.

The drop in inflation was due in large part to lower transport services costs, the ONS said, notably in air fares which were down from the same month a year earlier. Lower prices for food, soft drinks and clothing also weighed.

Food prices fell 0.6% from a month earlier the ONS said, as a result of price wars in British supermarkets.

On a month over month basis, the U.K. consumer price index declined 0.1% in May, compared to forecasts for a 0.2% rise.

Core CPI, which strips out food costs, but includes transportation costs, rose 1.6% year-over-year, slightly below expectations of 1.7%.

However, the report also showed that house prices rose 9.9% in April, their biggest annual increase since June 2010, fuelling fears over a bubble in the property market.

Despite the rapid economic recovery in the U.K. low levels of inflation have given the Bank of England leeway to keep interest rates on hold at record lows of 0.5%. But BoE Governor Mark Carney indicated last week that rates could rise sooner than markets expect as the recovery continues to gain momentum.

Elsewhere, the euro rose to session highs against the pound, with EUR/GBP rising 0.18% to 0.8006, holding above the one-and-a-half year low of 0.7958 struck on Monday.

The euro has weakened broadly since the European Central Bank announced stimulus measures earlier this month, in a bid to ward off deflation and spur growth in the euro zone.

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