Sterling steady as soft data is offset by BoE hike expectations

LONDON (Reuters) - Sterling edged up against the dollar and euro on Friday but finished the week in much the same place as it had started, with weaker-than-expected economic data being offset by hawkish comments from Bank of England policymakers.

FILE PHOTO - British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/Benoit Tessier/Illustration

The BoE’s chief economist Andy Haldane told parliament on Wednesday the central bank could end up needing to raise interest rates faster than investors currently expect, sending the pound higher.

Though Haldane’s colleagues at the Bank struck a slightly less hawkish tone, they were still upbeat. Governor Mark Carney said there was no need to give a direct commitment on rates as markets - which have largely priced in a May rate hike - had broadly understood the BoE’s message.

Thus an unexpected downward revision to Britain’s fourth-quarter GDP on Thursday only resulted in a temporary bout of sterling weakness.

At one point just after 1100 GMT on Friday, the pound suddenly lurched downwards, to as low as $1.3904, but it quickly recovered and by 1600 GMT was trading up 0.1 percent on the day at $1.3971.

Sean Dakin, a dealer at Mizuho bank in London, said headlines around British Health Minister Jeremy Hunt saying Britain could not stay in the EU’s customs union after Brexit might have triggered algorithms to sell sterling, which is why the move had been so sudden and brief.

“The market is definitely focusing on all these kinds of comments, but it bounced up pretty quickly, so you’d think it was probably algos,” said Dakin.

Against the euro, sterling was up 0.4 percent at 87.98 pence.

“The key takeaway from the Bank of England (this week) was that policymakers’ tolerance of inflation well above target has ended,” said City Index analyst Ken Odeluga.

“Sterling uncertainty remains, not least given the relapse of the dollar as its recent revival threatens to fade. But as UK monetary policy catches up with a stronger-than-forecast economy, probabilities for a sustained sterling recovery are rising,” Odeluga added.

Other data released this week showed wage growth steady in the last three-month period, but the jobless rate unexpectedly ticked higher. Again, the numbers had only a temporary and modestly negative effect on sterling.

BoE officials are likely to have noted pay jumping 2.8 percent in December alone in the same labour market numbers, though that was still weaker than the 3.0 percent reading of British consumer price inflation for December.

Editing by Kevin Liffey