Small dip for sterling after UK wages undershoot

LONDON, July 16 Wed Jul 16, 2014 5:40am EDT

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LONDON, July 16 (Reuters) - Sterling dipped on Wednesday after British wage data fell short of forecasts, failing to provide more evidence of a pick up in demand-led pressure on prices following a jump in inflation last month.

The debate over the strength of Britain's economic recovery, and the chances of the Bank of England raising interest rates before the end of the year, has moved on from employment to centre around inflation and wage growth.

The pound hit an almost six-year high of $1.7192 on Tuesday after June numbers showed a sharp rise in inflation to 1.9 percent, within touching distance of the Bank of England's 2 percent target.

But data on Wednesday showed total pay including bonuses rose an annual 0.3 percent in March-May, the weakest growth since the depths of the financial crisis five years ago and below a consensus forecast of 0.5 percent.

The pound dipped after the numbers to a session low of $1.7113 and was last trading at $1.7130, down 0.1 percent on the day. It was slightly firmer against the euro at 79.05 pence per euro.

"The immediate reaction to the data was lower," said Kiran Kowshik, a currency strategist at BNP Paribas in London.

"But we don't think that's the main message here. The jobs market continues to tighten and yesterday's data tells us that the UK is one of the few markets where inflation is coming back and interest rate rises are on the cards."

UNSHAKEN

The pound has been on a bull run for a year now, gaining almost 15 percent against the dollar and just over 10 percent against the euro. Faith in that rally has been questioned on several occasions this year, but for now seems hard to shake.

The Bank of England is expected to be the first major western central bank to raise interest rates. Of its developed world peers, only New Zealand is currently raising rates and that has underpinned the pound, particularly against the euro in the past month.

"As long as the correct fundamentals collaborate together, this rally might not be over yet," said Jameel Ahmad, Chief Market Analyst at retail trading platform FXTM.

"The next major resistance level is located at $1.7250. This valuation might require some more time to reach, but sterling/dollar bulls are proving resilient thus far."

As big an issue for sterling, given how much good news is priced in, may be the changing outlook for policy in the United States over the next few months.

It was U.S. Federal Reserve chair Janet Yellen's warning that interest rates could yet rise earlier than markets expect that brought the pound down off its highs on Tuesday.

But financial markets in general look sceptical about the Fed's will to get on with normalising interest rates - or the likelihood that inflation will bring much pressure to bear on them to do so.

"The broader message, from the UK and elsewhere, is that wages are not on the rise, inflation is not really an issue so the central banks are going to keep policy very loose for a long time to come," BNP's Kowshik said.

"Even in the UK, where we have the most hawkish of the major central banks, wage growth tells you that rates will only need to rise gradually and that will keep appetite for risk strong." (Editing by Catherine Evans)

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