Sterling edges down against dollar after weak UK wage data

LONDON, July 16 Wed Jul 16, 2014 9:11am EDT

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LONDON, July 16 (Reuters) - Sterling slipped against the dollar on Wednesday as soft British wage data failed to add to signs of growing demand-led pressure on prices after a jump in inflation in June, muddying the outlook for a UK interest rate hike later this year.

In general the pound traded in tight ranges, tracking a broad move higher for the dollar that drove the euro to its weakest in a month. Against sterling, the single currency dipped below 79 pence for the first time in almost two years.

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 on inflation and wage growth.

Data on Wednesday showed pay including bonuses rose an annual 0.3 percent in the three months to 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 hit a session low of $1.7113 after the data and was last trading at $1.7130, down 0.1 percent. It was slightly firmer against the euro at 78.98 pence per euro.

Kiran Kowshik, a currency strategist at BNP Paribas in London, said that despite the weak data the BoE was still likely to raise rates.

"The immediate reaction to the data was lower," he said.

"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."

The pound had 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.

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.

"Sterling is one of the few currencies that has captured the interest of institutional players in the past few months," said Benjamin Feuer, head of foreign exchange for EMEA with brokerage New Edge in London.

"Some of the locals here believe sterling is overvalued but I think from an international perspective it is pretty fairly valued. Realistically you probably wouldn't see it above $1.75 but you won't see it weaken either."

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 Hugh Lawson)

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