| LONDON, July 16
LONDON, July 16 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.
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)